Property costs: options available for tenants

Property costs represent a significant outgoing for businesses. In the current economic climate businesses will be mindful of these costs and decision makers responsible for ensuring maximum profits should be looking to see if savings can be made in this area. Below are a few options on how savings may be made:

Negotiate with the landlord
In the current market, where the supply of commercial properties outstrips demand tenants and prospective tenants are in a strong bargaining position, particularly where they are approaching break dates or lease expiry dates. Many landlords are agreeing to rent-free periods, reduced rents or capital contributions to secure lease extensions and guarantee an income for a longer period.

In serving any notices it is important to ensure that it is both valid and correctly served. If not the tenant may find itself without a premises and in a very weak negotiating position.

Relocation
If a tenant holds a lease for a property that is not ideal for its business, particularly where it is renting a property with a larger space than the business requires, it would be worth considering exercising a break option or terminating the lease at its expiry and relocating to somewhere more suitable and less expensive. In considering the potential savings it is important not to underestimate the cost of relocation, which can be both expensive and time-intensive. This may also have an impact on staff morale, so it is a good idea to spend some time ensuring that it will be a positive impact.
Another important consideration is the dilapidations liability of the business when it leaves the property. The business will probably be liable under the lease for the cost of making good any damage to the property. Where significant works are to be carried out it may be a good idea to make early arrangements to have these works done before the property is handed back to the landlord so as to have some degree of control over the costs, or to agree with the landlord a limit to the tenant’s liability.

Subletting or assigning part of the lease
Another option where a tenant has more space than it needs is to try to find somebody else to share that space with. If another business is prepared to take up the unoccupied space, the tenant may be able to sub-let or assign it thereby obtaining a contribution to the rental due on the premises.

Most leases will also contain provisions requiring the landlord’s consent before an assignment or sub-lease can be granted, and often there are restrictions over dividing the property, so this will also need to be checked before any action is taken. There is also likely to be a provision requiring the property to be reinstated to its former condition at the end of the lease. Depending upon the wording of the lease therefore any works carried out in dividing the premises may need to be reversed at the end of the lease period.

Sale and leaseback
Freehold owners may consider that it would be beneficial to sell the freehold in the property, receiving an immediate cash injection, and taking an immediate lease over the premises from the purchaser. This saves the cost and uncertainty of relocating, but to the detriment of the business’ control of the property interest. Before taking such an action the business will need to take into account the increased operational costs for the duration of the lease. There may also be tax implications on the sale of the property that should be borne in mind.

Other practical solutions
It is a good idea to monitor service charges closely. This gives an opportunity to identify and challenge any errors at an early stage. It is also advisable to review the management charges to check that they are not excessive or unnecessarily incurred.

There may also be an opportunity for the business to make savings by challenging rates assessments or by taking advantage of the various reliefs available, both temporary and permanent, for development or other works. These may require some input from a specialist surveyor.

A warning about serving notices
If it does not comply both with legal requirements and those of the lease it will not be deemed valid. Similarly if it is served in an incorrect manner or on the wrong person or entity it will not be deemed valid. The financial implications of an invalid notice can be huge, particularly where a tenant is seeking to enforce a break notice and there is no further option to determine the lease for a number of years. Furthermore, a landlord is under no obligation to acknowledge a notice or inform the tenant that it is invalid before the deadline for serving a notice and it is too late to serve a further notice. Great care should be taken when serving notices and legal advice is highly recommended. 

Whilst some of these options will require specialist input, others can be attained simply through careful consideration of the business needs and maintaining a dialogue with the landlord where there is one. However there are likely to be legal issues to consider, for example in serving effective notices, exercising break clauses, establishing dilapidations liabilities and considering alienation of all or part of the property.

For more information, please contact Thomas Holdaway on 0117 930 9549 or tholdaway@thrings.com.

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