Elevating Tenant / Landlord Relationships to a Commercial Insight

‘In a property lease the risk is taken by your landlord therefore it is very important that each side is certain that every detail is appropriate and fair.'

In July a RICS briefing took place on a reform of commercial leases in England and Wales. It was informed that government representatives and business representatives would be consulted over a review of a code of practice.

DUNNES STORES, the €3 billion grocery and fashion retailer, spent €3.5m last year to settle a dispute with tenants in its Crumlin shopping centre development in Dublin.  The Dunnes subsidiary that manages the centre saw its accumulated profits fall by €100,000 to just shy of €4m during the year. These costs related to settlement costs of the tenants in a shoping centre in Ireland. This was mainly to do with heating and changes in the rental agreements.

I am a trainee assistant surveyor to a chartered surveyor at 1stAssociated.co.uk. We carry out commercial surveys. This has brought to my attention the landlord and tenant relationship regarding commercial leases. The most recent surveys I will refer to are for an outright buy of an Industrial unit from a freeholder in Leamington and a lease for new tenants at a bar in Fulham.

In a property lease the risk is taken by your landlord therefore it is very important that each side is certain that every detail is appropriate and fair.

Landlords face a problem with dispute resolution over leases, confidentiality clauses and rent reviews. The main party to satisfy is the tenant and when they are not happy there are problems. I noted some of the main things that worry landlords.

There are certain scenarios that the landlord is involved in for a lease:

Repairs/maintenance

This is the most obvious scenario. The building is either freehold or leasehold. For a number of years it has been tenanted by a lessee like the one at our Leamington Spa survey. In this case we had a client who wanted to buy the warehouse outright but was being delayed by the old lessee who gave a superficial date of August for carrying out repairs. This was all dependant on the landlord’s ability to handle dilapidations.

Part of the problem in this survey was the absence of any lease to show the obligations of the covenant. In our survey we provided a summary of construction and an evaluation on the anticipated costs.  Such things would range from working on leaks, paint deterioration, cladding, car parking etc. One such major issue was the maintenance of the lift and health and safety standards being met. The region of the bill came to a total of approximately ten thousand pounds. However without the Deeds the chartered surveyor estimated they would carry out about five thousand pounds work for the new tenant. Dilapidations involve legal administration and business costs foregone for a landlord.

At the Latin fusion bar in Fulham we were prevented access to the roof above a bar which contained flats under it. Even though the roof was not immediately to do with the bar our survey would have to highlight to the landlord how it was causing leaks to the top floor flat. The reason for this is because our lessee would have to contribute to fifty percent of maintenance costs to the whole building along with tenants. The leaks were being created by peeling of the mastic seal around the lead roof. This was causing damp spots in the tenant’s top floor flat. This can is slightly fairer on tenants rather than having to foot the entire bill.

They can give away the property!

In some cases a landlord could find that a tenant may dispose of a unit to someone else for a different purpose. So for example if they intended to use it for cash carry but change to some other sort of business this would affect the condition it is received back in.   If it is designed for office purposes and this is stated in a lease it is important a tenant abides by this.

A tenant could also engage in sub letting. So while they are assigned the building they in turn lease it out to someone else. This can also mean that they have problems paying the rent and means they fall short of the lease. It is arguable that if the landlord permits this in the original lease then they may be able to increase the value they receive over time for their unit. So, for example, they could lease it out as storage for bikes and later as a sub let for weddings and parties helping generate more revenue. In this case it makes sense to contain terms that allow a wider use of the building.

Hey my Tenants are not leaving!

This is quite similar to the renting of a house for example meaning that when the contract is renewed under the Landlord and Tenant Act 1954 the tenants have the right to continue so long as the other party does not object.  So if the tenant manages to pay the rent on time bound by the Regulatory Reform Act 2003 despite you being a messy tenant and having friends around drinking, the landlord would not be able to regain possession of the bar. So long as they pay the rent on time they could stay.

Tenants Leaving!

A lease can have a break clause in it which allows a tenant to exit the lease. If at expiry of lease the landlord has to find new tenants this can involve considerable time and money.  Direct Investment in commercial property has offered a return of 186% in the last 10 years according to the RICS. Pubs, bars, factories, and warehouses are some of the best forms of Investment. However there is some speculation that the boom may soon be over, meaning the opportunity to find new lessees will prove harder and therefore costly. Could we be faced with unoccupied buildings in the future on the high streets? It is worth a thought.

Immediate Costs

Stamp Duty is a recognized cost. This varies at  different rates depending on the number of years of the lease if the lease is shorter than five years there is nothing to pay, whereas for more years there is an increasing duty.  Recently with the introduction of the smoking ban many firms’ pubs and bars have decided to cash in on the idea. They are providing smoking areas outside pubs and bars and charging premiums. In return the government is now considering whether to increase stamp duty taxes on these development sales or leases. In Swallow Hotels vs. IRC a 30 year lease was converted to a 999 year lease at approximately 2% stamp duty. This doubled from 1% on a property generating 14 million per annum in 1997.

Reviewing reform and will it get more unfair?

After considering the points made we can say that the risk is borne by the landlord and the idea for reform from the landlord point of view would be to improve the system of disputes and confidentiality clauses in the lease or deeds for tenants to follow. Professor Nick Crosby at the University of Reading recently commented that in the U.K the voluntary practice of landlords and tenants should be replaced with a more legislative route. He points to other countries that have already engaged in this, one of them being Australia where an enforceable framework is used for negotiations and lease. The U.K is voluntary. This however been made to work in the tenants favor more. Through factors such as rent reviews the landlord ultimately does have the upper hand.  Over a period of time especially if the unit is bought they often make a profit so it is a worthwhile investment,

Recently ‘Hammerson the leading FTSE 100 developer proposed its largest ever scheme in the square mile in London. They warn of how the city office market would be hit by the financial markets’.  The commercial market is currently worth 700 million in the U.K. It has recently invested 650 million in a hotel and a 40 ft skyscraper in London and voiced it probably wouldn’t proceed with the office work element without a ‘prelet’. This would relate to letting office units, it signifies the worry in the commercial market. Coupled with the unfairness that some landlords feel they face in this market, it could just be about to get even more unfair....

References:
Hammerson rings bells over city property – The Times.
www.rics.org
landlordzone.co.uk
www.firstassociated.co.uk - Sydenham industrial survey