Compliance

Throughout the year, the Board applied the principles of the UK Corporate Governance Code and complied with all of its provisions with the exception of provision B.1.2: that at least half the Board excluding the Chairman should comprise non- executive Directors determined by the Board to be independent. Set out below is an explanation of how the Group applied each of the principles of the UK Corporate Governance Code and in doing so how it complied with its provisions:

Leadership

The Group has a Board which is responsible to shareholders for the strategic direction of the Group and the stewardship of its activities. The roles of Chairman and Chief Executive are split. The Chairman is responsible for the leadership of the Board, ensuring its effectiveness and setting its agenda. The Chief Executive has responsibility for the management of the Group’s day-to-day operations. A formal statement of the division of responsibilities between the Chairman and Chief Executive has been adopted by the Board. The Group has a Senior Independent Director, and with effect from 1 October 2011, created a new role of Deputy Chairman.

There is a formal schedule of matters reserved for the Board for decision which is available on the Group’s website. The matters include approval of all acquisitions, disposals, major contracts, risk management and other strategic decisions.

Effectiveness

Board composition

The composition of the Board does not comply with the UK Corporate Governance Code recommendation that at least half the Board excluding the Chairman should comprise independent non-executive Directors. During the year, the Board comprised four executive Directors, four independent non- executive Directors, one non-executive Director not deemed independent and the Chairman who was deemed independent on his appointment. The Board considers its composition, in view of the nature of the Group’s activities, is appropriate for the effective governance of its business.

The Nomination Committee keeps the composition of the Board under review. During the year it considered the Board composition following the changes referred to above and led the process of the selection of new Directors, described in the Committee's report.

Board meetings

The Board met five times during the year. Its function is to formulate strategy and monitor and control operating and financial performance. This is achieved through the regular review of operations and detailed reports on activity within the Group’s property portfolio, quarterly financial reporting and forecasts, and regular reviews of risks and internal controls.

In addition to Board meetings, there is frequent and regular communication between executive and non-executive Directors to ensure that the non-executive Directors are fully aware of all aspects of the Group’s operations. The non-executive Directors met twice during the year without executive Directors or the Company Secretary present.

Board Committees

The Board has three Committees: Audit, Remuneration and Nomination. The terms of reference of these Committees are available on the Group’s website. The Company Secretary acts as Secretary to each of the Committees. Minutes of all Committee meetings are circulated to all Directors. Attendance at Board and Committee meetings is set out below:

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The meetings recorded above were the scheduled Board and Committee meetings. Additional meetings were held to deal with routine, operational and other matters as required and are not included in the meetings reported above.

Diversity

In September 2011, the Board approved a policy in line with Lord Davies’ recommendations in his report “Women on Boards”. The Board considers its current composition has the appropriate balance of skills and diversity to meet the requirements of the business. Diversity encompasses all aspects including gender and is considered during the search and selection process for executive and non-executive Directors and staff. The Board does not consider it appropriate at this stage to set quotas for board representation, but will monitor developments in best practice.

The gender ratios of the Group’s 19 staff are set out below:

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Directors’ training

The Chairman is responsible for ensuring Directors maintain the skills and knowledge required to fulfil their roles as Directors and this is considered as part of the annual appraisal process. Training records are maintained by the Company Secretary and reviewed by the Chairman. Directors are encouraged to maintain their professional skills and familiarity with the business. As part of this process, non-executive Directors have frequent dialogue with executive Directors and senior staff and carry out regular inspections of the Group’s portfolio.

All new Directors receive induction training led by the Chairman and administered by the Company Secretary. There were no new Directors appointed during the year, though upon his appointment, Christopher Ward will receive a tailored induction programme.

Directors may seek independent professional advice at the Group’s expense in furtherance of their duties as Directors.

Board performance

The Board undertakes an annual review of its performance and the performance of its Committees to ensure that they continue to operate effectively.

This year an external specialist board evaluation adviser was appointed to assist the Board’s review. They only provide board performance evaluation services. In consultation with the Chairman and the Company Secretary they set the context for the evaluation and devised tailored questionnaires to the specific needs of the Group. Board members were then requested to complete questionnaires addressing the performance of the Board, Committees, Chairman and individuals. Anonymity of all respondents was ensured in order to promote an open exchange of views.

The questionnaires addressed the following issues:

• Board composition, expertise and dynamics;
• Board support, time management and Committees;
• Strategic, operational and risk review; and
• Priorities for change.

The results were considered at the July 2011 Nomination Committee and Board meetings and in particular the Board considered:

• The current composition of the Board and the need for succession planning for the non-executive Directors coming to the end of their tenure was recognised. The attributes which will be sought in future non-executive Director appointments were identified;
• The role of the Board in overseeing executive succession was addressed;
• The appropriate level of contact between executive Directors and non-executive Directors outside meetings and the role that the Board might play in overseeing the development of employees;
• The operational priorities of the Company and its strategic plan. It was agreed that the Board agenda strikes the correct balance between strategic and performance issues;
• The process to identify the Group’s key risks, the extent to which they are controlled by the Group and the plans for mitigation of risk which were appropriate;
• The composition and performance of the Committees as well as the performance of the Chairman.

Re-election of Directors

At the 2011 Annual General Meeting the Board for the first time adopted the recommendation of the UK Corporate Governance Code that all directors stand for re-election each year. All Directors will stand for re-election at the 2012 Annual General Meeting.

Accountability

Internal control and risk management procedures

The Directors are responsible for the Group’s systems of internal controls and risk management and for reviewing their effectiveness. Such systems are designed to manage, rather than eliminate, the risks faced by the business and can provide only reasonable and not absolute assurance against material misstatement or loss. Their adequacy and effectiveness are monitored through the risk management and audit processes and by both the financial and estate management audits which are reported to the Board.

The principal risks and uncertainties identified in the review process and how they are managed or mitigated are summarised in the principal risks and uncertainties.

The Board confirms that procedures to identify, evaluate and manage the significant risks faced by the Group have been in place throughout the year under review and up to the date of approval of this Annual Report.

Executive Directors and staff meet regularly to review the risks facing the business, the controls established to minimise those risks and their effectiveness in operation. The aim of these reviews is to provide reasonable assurance that material risks and problems are identified with appropriate action taken at an early stage including insurance being in place where appropriate. Reports on this review process are submitted during the year to the Audit Committee and the Board to enable them to assess the effectiveness of the process and ensure that the Group complies with the Turnbull Guidance on Internal Control.

The key elements of the Group’s procedures and internal financial control framework, which are monitored throughout the year, are:

• The close involvement of the executive Directors in all aspects of day-to-day operations, including regular meetings with senior staff to review all operational aspects of the business;
• Clearly defined responsibilities and limits of authority. The Board has responsibility for strategy and has adopted a schedule of matters which are required to be brought to it for decision including acquisitions, disposals, major contracts and major refurbishment proposals which require the approval of the Board;
• A comprehensive system of financial reporting and forecasting. Consolidated accounts are prepared quarterly and submitted to the Board. Income statements and cash flow forecasts, and forecasts of bank facility covenant compliance are prepared at least quarterly, approved by the Board and used to monitor actual performance;
• The Finance Director has overall responsibility for the preparation of the financial information which is submitted to the Audit Committee and the Board. The Audit Committee ensures that the internal controls in the financial reporting process are in place and adequate;
• The day-to-day estate management of the Group’s portfolio is outsourced to three managing agents. The Group monitors the performance of each managing agent and has established extensive financial and operational controls to ensure that each maintains an acceptable level of service. The Group also uses the services of an external consultant to review periodically the operational processes and controls of each managing agent;
• A comprehensive manual recording the key business processes and related controls across the whole of the Group’s business is regularly updated and updates are reported to and reviewed by the Audit Committee.

The Audit Committee has not identified any material weaknesses in the Groups’ control structure. In view of the Group’s focussed nature of its business and on advice from the Audit Committee, the Board has resolved that at the present time there is no need to establish an internal audit function.

Directors' remuneration

This is set out in the Remuneration Report.

Relations with shareholders

The Company considers its relationship with shareholders to be extremely important. The Board encourages contact with all shareholders at the Annual General Meeting and throughout the year. The Chairman and Committee Chairmen are present at the Annual General Meeting to deal with any matters raised by shareholders and all other Directors attend.

The Chief Executive and executive Directors meet investors regularly during the year to discuss strategic and other issues within the constraints imposed by the Disclosure Rules and Transparency Rules of the UK Listing Authority. The meetings frequently include visits to the Group’s portfolio.

When the Group announces its annual and half year results, the Chief Executive and executive Directors make presentations to institutional investors and analysts and hold one to one briefings with key shareholders. Non-executive Directors, including the Senior Independent Director, also attend a number of these presentations and briefings. The presentations of annual and half year results are made available on the Group’s website in the Investor Relations section. The Board receives regular reports from its corporate advisers on shareholder meetings. The Chairman met with a number of shareholders during the year.

The Senior Independent Director is available to shareholders as an alternative channel of communication with the Board and all non-executive Directors are available to shareholders.

Going concern

The Group’s business activities, together with the factors affecting performance, position and future development are set out in the Business Review . The financial position of the Group including cash flow, liquidity, borrowings including undrawn facilities, debt maturity analysis and tenant lease profiles are also set out in the Business Review .

The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Therefore, they continue to adopt the going concern basis in preparing the financial statements.

On behalf of the Board

John Manser Chairman

30 November 2011