As we all know it's a tough business environment and where revenues are declining businesses are looking to cut costs and plan ahead.
Costs associated with property ownership and occupation are no exception. Businesses' property ownerships usually comprise the following:
- Freehold properties - i.e. those owned outright albeit possibly charged to the bank.
- Leasehold properties - i.e. usually leases of between 5-25 years at an open market rent subject to rent reviews. Rents are typically paid quarterly in advance.
Businesses are looking to review which properties are key to their continued operation and which are surplus.
Consider the following options:
- - Refinancing - it's a difficult market and many banks are still reluctant to make new lends but it is worth talking to banks/funders and seeing what opportunities there may be.
- - Sale and leasebacks - there are buyers with cash looking for investments. This option can generate capital and also secure a lease of the premises giving the business security of operation for the future.
- - Reduce overheads
- - insurance - talk to your broker
- - rates- rateable values are due to be revised in April 2010. The revisions will be based on rateable values as at April 2008. Given this period was affected by the current economic difficulties revised rateable values could be contentious - this increases the scope for challenging rateable values and is something all businesses should have an eye to.
- - Disposals. - Again, it's a tough market but there are signs of buyers, with funds, acquiring. Over recent years land available for residential development has been hot property. This is clearly an area that has been badly affected by the downturn however bear in mind that such land is also likely to be equally developable for care homes/nursing homes which remain relatively buoyant sectors.
- - lettings- look at letting out such properties to create short/medium term cashflow and quite possibly allow capital values to recover. Letting out properties can also reduce exposure to rates liability which will otherwise fall due if the property was left empty and the reliefs referred to below used up/not available.
- - rates- although the government has withdrawn empty rates relief industrial properties are still entitled to rates relief of up to 6 months upon falling vacant and other commercial premises are entitled to relief up to 3 months upon falling vacant. In addition where premises have a rateable value below £15,000 there is an additional government concession over the course of April 2009/March 2010 whereby these will be exempt from rates.
Leasehold property interests are a common way of businesses occupying premises. Managing these liabilities that leases carry will be a key concern to most businesses.
Here's a 5 step guide to dealing with leaseholds:
Step 1 - Get a clear picture of your leasehold commitments
- - Number of properties
- - Term - i.e. what's the balance of the term? Does the landlord have any rights to terminate early?
- - Rent - what's your current rent? Are there any outstanding rent reviews?
- - Rent Reviews - when's the next rent review due? What's the rent review cycle? What's the basis for rent review?
- - Break rights - do you have any? What are the notice periods? Are there any pre-conditions?
- - Rights to Dispose - assignment/underletting - what are your options here?
- - User - what flexibility have you got to diversify use and/or allow a third party to come in and occupy for an alternative use?
- - Repair obligations and dilapidations liabilities - what's the standard to which you have got to keep the premises? What would be the likely liability to the landlord in the event that you vacated?
Being clear on the above points can help you understand clearly your continued costs of occupying, the options for vacating and your likely exit liabilities.
- - Identify which properties you wish to keep and which are surplus
Step 3 - Where keeping - reduce costs
- - Rent reviews - most rent reviews are upwards only i.e. you pay the higher of the current open market rent or the current passing rent. Typical rent review cycles are every 5 years. Check the likelihood of the rent review increasing and your strength of case for arguing for a nil increase.
- - Rent - many businesses are experiencing difficulties in paying current rents. Failure to pay potentially exposes tenants to various landlord remedies such as:
- - Being sued
- - Distress (i.e. having goods taken to set off against arrears)
- -Forfeiture (i.e. termination of the lease by reason of tenant default).
- However in the current environment these are heavy-handed steps for a landlord to take - the result could be a tenant goes out of business and/or the premises have to be relet with the landlord in the meantime having to pick up rates liability. New tenants on comparable terms are likely to be difficult to come by. In the light of this new reality where rent is currently unaffordable consider discussing this with the landlord and see if you can work together to agree a concession, albeit of a temporary nature. It could well be in both parties' interest. Examples include rather than paying quarterly rent paying rent monthly and/or reduce rents over a limited period.
- - Service charges - if there is a service charge it is worth checking that its being correctly applied. This is particularly the case if the premises is part of a multi-let building or estate. You would want to be sure that the service charge is being correctly allocated between all parties and the current occupants are not subsidising service charge voids from vacant premises.
- - Insurance - in most cases the landlord insures. Check to ensure that current premiums are competitive and being fairly apportioned.
- - Rates - it's usual that tenants are responsible for rates but have an eye to the revision of any rateable values (see earlier) and your potential to challenge them.
Where surplus, look to dispose
Relevant matters are:
- - Break rights - it's crucial that when you have a break notice it's served correctly. It's also crucial that if there are any pre-conditions associated with exercising the break( i.e. notice periods, delivering up of the premises in good repair, having paid all sums to date) that you adhere to these and have a strategy to ensure your break goes smoothly. Any break notices should be served on your behalf by a lawyer and it's useful to get advice from both lawyers and surveyors in connection with the exercise of any break notice to ensure that it's effective and isn't challenged. In this environment landlords have every incentive to challenge break notices given that the deals on offer in a re-letting market are likely to be less favourable.
- - Assignment - this is the transfer of lease to a third party. It's likely that this is going to be subject to your landlord's consent (not to be unreasonably withheld). When assigning its crucial to be satisfied that the incoming party is capable of performing the ongoing obligations under the lease - this will be a matter of concern both for your landlord and for you and in the event of any doubt appropriate security should be required.
- - Underletting - again this will be subject to the consent of the landlord (not to be unreasonably withheld). The test for undertenants is however a little less stringent than for an incoming assignee given that the current tenant will remain on the hook to the landlord for the rent and compliance with the lease terms. The option of underletting can be particularly attractive when part of your premises is vacant and it may be possible to underlet part - its worth checking your lease in this regard.
- - Negotiate a surrender - if none of the above work for you always consider this option as you may be able to strike a deal with your landlord.
- - Dilapidations liabilities - where your lease ends the landlord will expect the premises to be delivered up in accordance with your repairing obligation. Sometimes this is qualified by reference to a schedule of condition when you took on the lease but sometimes it's a full repairing obligation (i.e. you should hand the premises back in good repair free from defects regardless the state and condition of the premises at the start of the lease-this can actually mean giving the premises back in a better state and condition). In the run up to your lease ending its common for landlord to serve a schedule of dilapidations - in the event of this it is useful to talk to a building surveyor as often a landlord's assessment of what is required to repair the premises may well exceed your legal responsibilities. Unless you negotiate and settle this matter direct with your landlord you could be exposing yourself to substantial liabilities which the landlord may pursue after the lease has come to an end.
- - Rates-again where premises are vacant make sure any reliefs/exemptions are maximized
Looking to the future
After many years of buyers and tenants chasing after properties the current economic challenges mean that the balance of bargaining power has changed. It is no longer a seller's market, it's a buyer's market. As businesses cautiously tread forwards not only will this be reflected in terms of the prices and rents paid for property but it will also be reflected more widely in the terms struck i.e. deals to buy properties may be subject to more conditions , smaller deposits and deferred payment arrangements whilst tenancies are likely to be subject to more flexibility e.g. break rights and more limited repairing obligations. So whether you are disposing or acquiring be practical and strike the best deal in this new environment.
Where we can help
We've got a team of lawyers who are familiar with and experienced in advising on all the above issues whether we're acting for seller's,buyers,landlords,tenants or funders.It's what we do day in day out.Our approach is to come up with practical cost effective solutions.If you've got a concern relating to a property or indeed want to discuss anything mentioned in this blog and how it could relate to your business please contact me for a free no obligation discussion.
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