Derry’s Department Store, Plymouth

The former Derry’s Department Store comprised a 139,205 sq ft (12,937 sq m) of vacant and functionally obsolete space held on three co-terminus, full repairing leases to the Co-operative Group. The leases had 7 years unexpired at a combined rent of £912,500 pax. With the addition of business rates, service charge and insurance, the total annual vacant holding cost was £1,354,000. The Co-op had an IAS37 provision of £6.77m reflecting the NPV exit cost.

Reflecting the functionally obsolete nature of the building and the effect of the declining lease term on the landlords investment value, redevelopment was the most realistic solution for both landlord and tenant. To facilitate this, the landlord, Aberdeen Asset Management, required certainty on vacant possession but could not commit to a surrender until all the enabling factors such as a detailed planning consent and pre-let occupier commitments had been lined-up.

The solution was an agreement for surrender and call option whereby the landlord could call for completion of the surrender at any time before the 15 month long-stop date expired with the Co-op paying a maximum surrender premium of £3.0m. The actual surrender premium was however to be reduced by the amount already paid in rent, service charge and insurance during the agreement period. The surrender was ultimately completed simultaneously with a sale of the property to a developer for conversion of the building to provide a 110-room Premier Inn Hotel, 500 –bedroom student accommodation block and 75,000 sq ft of retail and leisure space. The surrender brought certainty to the Co-op and enabled it to release over £3.5m of provision back to P&L.