Occupiers of offices, shops and industrial space need to ensure their property costs are minimised in the current economic climate and landlords often struggle to find ways of improving the value of their commercial property investment when rents are not increasing.Many companies took out leases in more buoyant times, which are legally binding on both landlord and tenant. Often however situations can arise when it is in the interests of both parties to look again at the initial agreement to reflect situations that may have only occurred in more recent times.
An increasing number of businesses are employing the services of commercial property consultants to assess whether there are opportunities to restructure their leases in order to reduce their property costs.
Tom Holloway, Director, Holloway
Iliffe & Mitchell said:
“Businesses experiencing genuine
financial hardship frequently find rent and service charge payments form a large
part of their fixed outgoings and these payments can often force them into
administration or receivership if landlords do not agree to lease
amendments.”
Leases on commercial properties
normally have upward only rent review clauses and these can make matters very
tough for tenants, operating in sectors with falling sales and turnover, such as
those in the retail sector. The June 2012 quarter day saw a number of well known
retail brands such as Jane Norman, Kitchens Direct, Sharps and Habitat enter
administration because the rental demands from Landlords could not be met.
Craig Powell, Associate Director,
Holloway Iliffe & Mitchell commented:
“Many landlords are keen to ensure
that their property remains occupied and will consider short term reduced rental
payments or monthly payments (as opposed to quarterly demands) to assist
companies stabilise their cash flow or reduce bank debt.”
“I fear retailers will find the
September 2012 quarter day even more challenging as they will have purchased
Christmas stock but will not have received any income from these seasonal
items.”
“Our extensive experience in
commercial lease consultancy has meant we have been successful in providing a
mediation service between landlord and tenant to ensure that both gain from a
difficult situation”
In situations where the tenant may
be on the brink of failure more extreme measures such as payment holidays may
also be agreed to allow them a chance to prepare a plan to turn around the
business. Sometimes though a dramatic reduction in turnover may have more to do
with a change in consumer habits than be directly related to the general economy
examples would include DVD rental units and off-licences and in this situation
the business may not be saved.
A tenanted property with income
will almost always be worth more than a vacant building, which could take months
to re-let, so landlords with the foresight to agree revised terms with a tenant
experiencing difficulties may enhance the value of their property by keeping it
occupied – as long as the rent is still being paid!
“Tenants fortunate enough to be
trading successfully who are approaching significant lease dates such as a break
clause or lease end may also be able to re-negotiate their terms to their
advantage.”
For example, a tenant with a break clause approaching who
decides that they no longer require this flexibility, may discuss with the
landlord the removal of this option by re-gearing the lease in exchange for a
reduced rent, rent free period, capital contribution or capped service charge.
The owner improves the asset value of their investment, as the guaranteed term
of rental income is increased, by the removal of the break option, and the
tenant reduces their costs which is a true ‘win-win’ situation.
