LCP Proudreed PLC - Irish Stock Exchange

Dependence on Occupational Tenants and Re-letting risks
During the term of the Commercial Mortgage Loan Agreements, a number of the existing Occupational
Leases which are in place at the Closing Date and many new Occupational Leases granted (or to be
granted) in the near future will expire or be determined in accordance with their respective contractual
terms. There can be no assurance that Occupational Tenants will renew their respective Occupational
Leases or, if they do not, that new Occupational Tenants of equivalent standing will be found to take up
replacement Occupational Leases. This is particularly the case where a Secured Property requires
refurbishment or redevelopment following the expiry of the Occupational Lease. Furthermore, even if
such renewals are effected or replacement Occupational Leases are granted, there can be no assurance (in
spite of the covenants given by each Borrower under the relevant Commercial Mortgage Loan
Agreement in this regard) that such renewals or replacement Occupational Leases will be on terms
(including rental levels and rent review terms) as favourable to the relevant Borrower as those which exist
now or before such termination (particularly if there is a change in law relating to the terms of the
Occupational Leases or some other change that is outside of any Borrower’s control), nor that the
covenant strength of Occupational Tenants who renew their Occupational Leases or new Occupational
Tenants who replace them will be the same as, or equivalent to, those now existing or existing before such
termination.
The ability of the Borrowers to attract new tenants paying rent levels sufficient to allow them to meet their
obligations under the Transaction Documents will depend on demand for space at each relevant Secured
Property and on the regional economy in the relevant Secured Property’s catchment area, which can be
influenced by a number of factors. Rental levels and the affordability of rents, the size and quality of the
building, the mix of tenants, the amenities and facilities offered, the convenience, location and local
environment of the relevant Secured Property, the amount of competing space available, the transport
infrastructure and the age and facilities of the building in comparison to the alternatives are all examples
of factors which influence tenant demand.
Similarly, changes to the infrastructure, demographics, planning regulations and economic circumstances
relating to the surrounding areas on which the relevant Secured Property depends for its tenant base may
adversely affect the demand for such Secured Property.
Provision of services and recoverability of service charge
In each Occupational Lease that is an effective full repairing and insuring lease (an ‘‘FRI Lease’’), the
relevant Borrowers are or will be bound, inter alia, to allow the relevant Occupational Tenant ‘‘quiet
enjoyment’’ of that part of the Secured Property which is leased to it and to perform certain specified
obligations and/or provide certain specific services in relation to the Secured Property. A breach by the
relevant Borrower of any of these covenants could give rise to a dispute with the relevant Occupational
Tenant and such Occupational Tenant might seek to withhold rental payments. Certain of the
Occupational Leases expressly exclude the Occupational Tenants’ set-off rights, but many do not do so.
A number of the Occupational Leases are not FRI Leases in that they may provide for one or more of
the following:
• a fully inclusive rent (i.e. inclusive of service charge, insurance costs and/or outgoings);
• a cap on service charge through an annual indexation or otherwise;
• exclusion of some costs from the scope of service charge, but which the landlord must pay, such as
the costs of remedying inherent defects or historic contamination, or complying with Headlease
obligations;
• a limit of the period for which the cost of loss of rent insurance is chargeable to the Occupational
Tenant which may be less than the period for which the landlord has such insurance; and
• a limit on the extent of the tenant’s repairing covenant, typically by reference to a schedule of
condition of the relevant Secured Property.
Any of these situations may lead to a shortfall in the amount of service charge and other expenditure
recoverable from Occupational Tenants. The relevant Borrower would almost certainly have to make up
any such shortfall.
The level of service charges and insurance rent (being equivalent to the cost of insurance recoverable by
the landlord) payable by Occupational Tenants under the Occupational Leases may differ, but the overall
level of service charges and insurance rents payable by all Occupational Tenants is normally set at a level
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