Greed Is Good: Halliwells, A Law Unto Themselves

A very interesting article about the downfall of Halliwells. From Propertyweek.(click on the link to see pictures of their 3 Hardman Square offices)


A law unto themselves

A boom-time property deal allowed partners of Manchester law firm Halliwells to pay themselves £21m less than three years before the business’s collapse


It was flash from top to bottom. The double-height reception area must have been 10,000 sq ft. The boardrooms were beautiful with enormous grand tables and some of the best views in the city. Their old offices were understated and bland, so they were trying to make a statement.

“It was like something from LA Law.”

This is how a former client recalls the former headquarters of regional law firm Halliwells at 3 Hardman Square at Spinningfields in Manchester.

Five years ago Halliwells was a rapidly expanding partnership, punching above its weight and, at its peak, generating £88m a year in fees.

But in July this year it went into administration and property liabilities were at the heart of its tumultuous downfall.

The rise and fall of Halliwells is a classic noughties boom-and-bust tale. It raises serious questions about the strength of covenants of limited liability partnerships, the due diligence carried out by a key investor and, most of all, the dangers of medium-sized firms dabbling in big-time property.

But many in its home town of Manchester also put its fate down to old-fashioned greed.

Halliwells’ final full-year accounts to April 2009 show profit available for division among members at £17.05m, but there was no more detail. However, in a seven-page letter to creditors on 26 July, its administrator, BDO, explained that the firm had made a net loss of £1.8m. That year the partners took more out of the firm than it made.

“It is hard to describe what they did without using the word greed,” says Dermot Power, partner at BDO and the joint administrator of Halliwells.

Some of the former partners could now face legal action, which one partner told Property Week says is having a stressful impact on all their professional and family lives.

The rise and fall of Halliwells starts in November 2004. The property market had recovered from its post-9/11 shock; Manchester United were FA cup holders; Oasis were recording their sixth album, Don’t Believe the Truth and Halliwells was on a roll.

With its roots as Halliwell Landau, the firm had enjoyed an unremarkable history since it was founded in 1975. But as the boom times rolled, the company rebranded as Halliwells and became a partnership in 2004.

As it undertook a policy of aggressive corporate expansion, the firm set its sights on a new headquarters, and agreed to prelease all of Allied London’s 180,000 sq ft 3 Hardman Squareat Spinningfields.

The proposal

Initially the firm had agreed with the developer to take only 120,000 sq ft with a rent-free incentive at the Foster & Partners-designed building. However, Halliwells returned to the negotiating table to propose a new deal.

“Halliwells came back to us, having come up with the idea,” recalls Michael Ingall, chief executive of Allied London. “They asked us whether, if they took the whole building and put a big rent on it, we would be prepared to sell the building and share the profit.”

“Halliwells didn’t consider it was being too ambitious in taking the whole building,” recalls Peter Skelton, head of Lambert Smith Hampton’s Manchester office, which represented Halliwells. “From where it thought it would be in five years’ time, it thought it would need at minimum the whole of the building.”

Halliwells put forward a deal whereby it would forfeit its rent-free period in exchange for 25% of the profit Allied London received when it sold the building. It subsequently agreed a 22-year lease on the space at £26/sq ft with no breaks and fixed rental uplifts.

“They had a growing business and were making corporate acquisitions, so what they did seemed quite novel at the time,” says Ingall.

Allied London sold 3 Hardman Square to Morley Fund Management, now Aviva Investors, for around £110m in September 2006 and Halliwells received a £21m payment.

Despite an element of resistance, the partnership voted that around £6.5m would be spent on fitting out the building and around £7m would be retained within the business. The remainder was to be distributed as profit.

The fit-out was meant to be part-funded by the payment from Allied London and partly from cash that was being generated by the firm at the time.

The arrangement between Allied London and Halliwells was led by Ian Austin, then managing partner of the firm, who is understood to have been awarded a bonus for organising the transaction.

Instead of retaining any of the payment within the firm, the money was distributed to 39 equity partners as profit, proportionate to their stake in the business.

Meanwhile, the fit-out by architect Sheppard Robson cost around £20m – three times more than was originally estimated. As a result, it was part-funded with debt from the Royal Bank of Scotland. Halliwells ultimately ended up owing the bank £19.8m. It is the only secured creditor to the limited liability partnership, so it is unlikely any other creditors will see any return.

When Property Week spoke to a former senior partner at the firm who was central to structuring the deal, he said the capital was not retained in the business because it would have been subject to 40% tax. The partner also stressed that, as a limited liability partnership, the firm was obliged to distribute profits within a year.

Halliwells started paying rent at 3 Hardman Square in March 2007 and took occupation in September that year. In anticipation of the move, it undertook aggressive corporate expansion. Most notably it took over insurance specialist James Chapman & Co in March 2006 – a deal that a former Halliwells partner later called “a disaster”, as the impact
of the downturn set in.

Partners’ exodus

With no contractual agreement to remain with the partnership, 24 of the firm’s 39 equity partners that benefited from the deal then retired or left for rivals, which dealt a devastating blow to the firm’s revenue.

Julian Lewis, head of its London corporate team, left for Fladgate in May 2008; Simon Hardwick, head of London real estate and property partner, left to join the legal team of PricewaterhouseCoopers in September 2008 and former senior partner Clive Garston left in August 2008, eventually joining Davies Arnold Cooper. Combined with a market downturn, this exodus spelled the end for Halliwells.

Despite the market stuttering, German open-ended funds were still cash rich and, in January 2008, CS Euroreal, a fund operated by Credit Suisse Asset Management, bought 3 Hardman Square for £95m from Morley.

It was a deal that ultimately left the purchaser with the brunt of the liability from the downfall of Halliwells.

Paying the price

Credit Suisse Asset Management declined to speak to Property Week, but a source involved in the purchase explained that a competitive bidding process was driven by a lack of available stock and a belief that Morley would be under pressure to sell, as it had started to see outflows from its funds.

The source also said that thorough due diligence was carried out on the building’s tenant, Halliwells, and there appeared to be no cause for concern at the time.

In the wake of Halliwells’ collapse, CS Euroreal’s 180,000 sq ft building is virtually empty and it has instructed CB Richard Ellis to market the space.

However, it is not the only creditor to be left in the lurch. The firm’s bullish move to Spinningfields meant an exit from St James’s Court on Brown Street in Manchester. The 37,000 sq ft building is owned by the Himor Group, the investment vehicle for north-west property dynasty the Ainscough family.

Halliwells took a 25-year lease on this building in February 1997 with a purported break clause in 2013. The current liability is £745,000 a year, equivalent to £20/sq ft in rent.
The building had been sublet to serviced office firm Your Space in August 2008, but the company entered administration in April this year and another serviced operator, YSes, is now in occupation.

However, Halliwells is still ultimately responsible for the liability and it is understood that Himor has hired law firm Eversheds to explore its legal options. Crucially, unlike at Spinningfields, four partners signed guarantees on the lease and this could increase Himor’s chances of retrieving payment.

Former litigation partner Paul Thomas, former senior partner Alec Craig, former property partner Matt Wightman and former insurance liability partner Chris Phillips, all of whom benefited from the Spinningfields windfall, are the guarantors.

Phillips and Wightman left the partnership in March 2009 and May 2009 respectively and are understood to be disputing their liability on the assumption the guarantee would be passed onto partners still at the firm after their departure.

Thomas is understood to have written to some former equity partners to demand that they help meet the liability. One former equity partner, who is not a guarantor on the lease, told Property Week that he was willing to help.

“I would be delighted if everyone contributed,” he says. “So many partners left Halliwells and there should be an obligation.”

Halliwells is also subject to leases on smaller premises in London, Manchester, Sheffield and two in Liverpool.

Law out of order

The lease on St James’s Court is also not the only personal liability of the 15 former equity partners left at Halliwells when it entered administration.

Although RBS is the limited liability partnership’s only secured creditor, individual partners are liable for professional-practice loans made by Handelsbanken, as a result of a mandatory cash call in September 2008. Equity partners were asked to double their capital in the firm and fixed-share partners were asked to contribute £10,000-£20,000 each.
This was followed by a voluntary cash call in January this year, when £2.3m of loans were made to partners by the Co-operative Bank, for which they are also liable.

“It was a big gamble and you have to ask, what was the driver?” says BDO administrator Dermot Power, who is charged with the responsibility of returning cash to its creditors. The task means delving into Halliwell’s past.

In an 85-page report, put together by the administrators and sent to creditors on 13 September, Power states: “I understand that it was the policy of the members to draw remuneration, equivalent to substantially all of the LLP’s projected profit available, for division among members.”

The report also shows the firm to have more than £30m of liabilities in a draft balance sheet as at 30 April 2010.

BDO is considering legal action against former equity partners to retrieve the money owed, which one former equity partner described as “a constant worry” for him and his family.

“This will be a big test of exactly how the law around limited liability partnerships works,” Power warns.

In July, BDO orchestrated the sale of elements of the business to rival law firms Barlow Lyde & Gilbert, HBJ Gateley Wareing and Hill Dickinson, recouping only around £7m for primary creditor RBS.

Those partners who were subject to the cash calls and have moved on to these companies are now having to work to service the personal debt that they took on to try to keep Halliwells afloat. The others that left Halliwells after benefiting from the £21m payout may well escape reprisal.

Halliwells’ collapse questions the value of limited liability partnership covenants in all property deals – and will make those working within partnerships think twice before trusting their fellow partners.

“Not a single individual was tied in to the lease at Spinningfields,” says head of Lambert Smith Hampton Peter Skelton. “As a result, the whole structure of deals between landlords and limited liability partnerships could change, with landlords requiring personal guarantees from members
as protection.”


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