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.
