ARTICLE ORIGINALLY PUBLISHED SEPTEMBER 2018
In my last article I set out my company’s broad approach to investing in commercial property and in Poland in particular. I thought it might be interesting for anyone considering investing in Poland to hear about one of our first investments there, a near disaster, and the lesson we learnt.
The investment was made in October 2005, a year and a half after Poland joined the EU. The Polish commercial legal system and conveyancing of property has improved since then but the experience was and remains informative.
We had commenced our operations in Poland a few months earlier and had decided that, as our first investment, we would target something small, ideally a neighbourhood type supermarket. In the UK such investments were at the time and in many ways remain rather attractive having, as they do, the benefit of a sought after planning consent and typically being leased to good covenants on good terms.
It was not long before we alighted upon a company called Marcpol, a Warsaw based mid-sized supermarket operator offering a better than average range of products. Unlike most supermarket operators in Poland, it was locally owned by a gentleman called Mr. Mikuskiewicz. Marcpol was expanding and he was keen to undertake some sale and lease backs to release capital for growth. He offered to us for sale an established supermarket in Praga, a district of Warsaw on the eastern side of the Vistula.
The shop presented well. It had good frontage, was fitted out well, had adequate car parking and was surrounded by residential. It was clearly trading its socks off. The shop, which had been created by Marcpol out of a disused 1950’s cinema, extended to some 1,300 sq. m. At a rent of €11 per sq m per month (£8.20 per sq ft per annum), subject to a fully repairing and insuring lease with a 35 year term and a purchase price equating to a yield of 9% per annum, it seemed like a no brainer.
Terms were agreed and we appointed Norton Rose, a top tier UK law firm to represent us. In the UK we would never use a top tier firm. Their fees are disproportionately high for the task to be performed but in Poland, for our first purchase, we wanted to ensure that we had the best legal advice and recourse, if necessary, to a UK PI policy. So far so good.
Norton Rose undertook due diligence for us, assisted with negotiations over the lease and advised on the purchase contract. Because it was a relatively small purchase, of some €2 million, we did not seek a bank loan up front. Our intention had been to refinance it post purchase.
Norton Rose produced its reports on title, lease and contract which gave the transaction a clean bill of health and we duly bought the property.
We felt quite smug with the purchase and touted it round our shareholders and clients as an example of something which we could roll out on a larger basis. Similar properties in the UK were by now trading on yields of around 6% per annum or less. So a purchase on a yield of 9% per annum with such attractive lease terms was mouth-watering.
Everything went well for the first couple of months of our ownership. Then a bombshell hit us. The City of Warsaw wrote to us requiring that we adhere to the court verdict issued six months earlier directing Marcpol to convert the supermarket back to its previous use of a cinema! Unknown to us and not revealed by Norton Rose’s report, Marcpol had fought and lost a case over the right to use the property as a supermarket. It did not have a valid planning consent.
I do not need to describe the utter shock I experienced. We had been had and our lawyers had apparently been negligent. It would have been standard working practice in the UK to review the planning consents and litigation to which a property is subject. But they had not.
We immediately brought the matter to the attention of senior management at Norton Rose. We felt that our only hope was now a successful claim against its PI policy, though this would not have compensated us for the reputational damage and the abrupt end of all our aspirations for developing a business in Poland.