Global menu

Our global pages

Close

The Logistics Sector: 2020 was a turning point. There’s no going back now.

  • United Kingdom
  • Corporate Real estate
  • Real estate
  • Real estate planning

27-01-2021

What a year 2020 was for the logistics sector. The sector achieved nationwide prominence due to Brexit, lorry queues in Kent, the seemingly unstoppable rise and rise of e-tailing and, of course, COVID-19. Phrases such as cold-chain supply, stockpiling and 3PLs are now in everyday business use. No one would have predicted that back in February 2020.

When we last wrote an article about logistics back in 2018 it seemed clear that the logistics market would continue to grow, but its light was still best known within the bushel of logistics professionals and the specialist logistics market. How things have changed in less than two years! Despite the difficulties during the year we have all experienced, the logistics market is now up there front and centre in lights and the importance of the sector to peoples’ day to day lives is finally beginning to hit home (literally with constant domestic deliveries). The logistics industry is now rightly seen as a vital part of our national infrastructure and essentially a key utility for the UK.

But what are the specialist legal considerations to be considered when acting for a logistics client?

First come the planning issues. Finding and unlocking the development land for the big box shed schemes is a deal in itself. Sometimes it is even beyond the reach of an ordinary planning consent; large schemes categorised as nationally significant infrastructure projects (NSIPs) may be authorised by a development consent order instead, which is rare and highly specialised planning law. Conversely, finding and unlocking the development land for the niche last mile logistics space, on a smaller scale and closer to urban areas,(even more important now given the likelihood we will all work from home more in the future), might require planning creativity: perhaps putting forward mixed use schemes or challenging the status of an area of green belt land which is in fact more brownfield than beautiful.

Something not so obvious given current economic concerns but availability of workers to run these highly complex buildings is a key consideration to the occupiers. A lot of the big box shed schemes have reduced unemployment in that area to the extent that workers have to be bussed in from elsewhere for any future ones. A good problem to have.

With the logistics sector interested in space both large and small, the construction law considerations are varied. The big box sheds standing beside motorway junctions are becoming forever larger. To satisfy the enormous square footage of floor space required for the largest logistics customers, these big box warehouses now have multi-level mezzanine floors and the automation is becoming much more sophisticated. As the complexity of the buildings delivered increases so does the expertise required to deal with the inter-locking building contracts required to deliver the building, together with the infrastructure, such as roads and utilities. The terms of appointment and warranties from the professional team involved in the project are particularly important backed up by latent defects insurance policies. These are big and precious buildings which are business critical to the occupiers and used 24/7.

With the increasing importance of rail freight, these huge buildings are now found around rail freight terminals and not just alongside motorways. The rail freight terminal and the logistics estate will form one inter-dependent development, requiring the input and esoteric expertise of those specialised in rail regulation.

For smaller, more central spaces, the constraints of a site might mean a shared plinth development, a mixed-use development (beds and sheds) or development in conjunction with, or with the co-operation of, rail operators. Such sites require careful legal structuring alongside their complicated construction with shared structures and asset protection agreements. And all this before there is a building to be let.

The leases of such premises have their special features. For example, logistics lease terms tend to be longer than leases in other sectors due to the significant capital outlay of both the developer and occupier. A minimum 15-year term is the norm. However, these leases often do not simply have a straightforward term. Their terms are often linked to customer contracts and business flow by break rights and renewal options.

The alienation provisions have to reflect the way the logistics sector works in practice. Often this means wider sharing of occupation permissions so that the occupier may share the premises with group companies or service providers. Sometimes, however, the occupier’s customer will occupy (not sub-let) the whole of the building for its own business and this will need to be dealt with in the drafting. Alongside this there are likely to be generous sub-letting provisions allowing sub-letting of part, perhaps with a maximum number of occupiers and a minimum of permitted parts. The Landlord will not be permitted entry around Christmas time (the “Santa Clause”) to ensure there is no disruption to the occupiers at their busiest time of year.

The rent review under such leases is often a challenge due to the lack of comparable properties on which to base an open market rent. Given the nightmares that come with drafting hypothetical premises for hypothetical lettings it isn’t a surprise perhaps that retail prices index rent review increases rule in logistics leases, with their caps and collars.

Access is everything for a logistics occupier, so there will be particular concerns regarding the extent of private rights of way, the adequacy and maintenance of estate roads, and so on. When part of a wider logistics estate, often key occupiers will require a right to step-in and carry out roadway repair and maintenance if the landlord or management company fails to fulfil its covenants. Occupiers must be comfortable that there is no restriction on the number of and times that vehicles can access the building. The sites will often require a heavy degree of servicing, so the dimensions of service yards and turning circles, and landlord obligations to ensure the supply of utilities and a clear run for vehicles, are often of critical importance and the subject of extensive contractual commitments.

Just occasionally a lease will be completed rather earlier than might be expected. As an occupier begins a multi-million pound fit out with bespoke and proprietary high-tech kit, that same occupier might well want control of the site and its security, notwithstanding the fact that elements of the landlord’s development works have yet to complete.

Logistics deals can often be of exam question complexity, containing many moving parts and a myriad of experts. On top of the work required to assemble the site, provide the legal framework for the building and complete the letting, there will also be the usual corporate and tax considerations requiring their own thoughts and specialists.

2021 should see the UK slowly but surely returning to a pre March 2020 state of affairs, but for any future logistics historians out there it is likely that 2020 will be seen as a massive turning point, in the recognition of the importance of logistics to people’s lives and to UK plc’s economy and politics.

This article appeared in the January/February 2021 issue of PLC Magazine which can accessed online.