6 things to be aware of when your commercial lease is coming to an end

6 things to be aware of when your commercial lease is coming to an end

 

When your commercial lease is coming to an end there are certain things that you should be aware of. We take a look at the six most important points:

1) You have the right to renew

Some commercial tenants, such as farm business tenants, those with fixed-term leases of six months’ duration or less, and those who are using the premises without the landlord’s permission, do not have the right to renew their leases. For most other commercial tenants, however, should they wish to do so and with the landlord’s agreement, can renew their leases after the initial term has expired. This right is protected in law under the Landlord and Tenant Act (1954) – it is up to you to check your lease to ensure that your commercial lease has not been excluded from this.

2) Both you and your landlord can end the tenancy early

If your lease has a break clause it is possible that either you or your landlord can end the tenancy early. Other circumstances which might involve ending the lease before it expires include the tenant failing to pay the rent, or if they are able to transfer the lease to another tenant (assigning).

3) Plan well ahead

Most experts recommend that you begin planning for the end of your commercial lease well ahead of time – in some cases, they suggest at least 12 months, with some suggesting two years. This is to ensure that both you and your landlord understand the situation and can make contingency plans for the future. It is also to ensure that you give your landlord the required legal notice of either vacating the property (at least three months’ notice) or renewing your lease (between 6 and 12 months’ notice)

4) You can negotiate the amount of rent you pay for a new lease

If market rates are dropping in your area, it may be advantageous to you to negotiate your new lease in line with open market rents.

5) Consider your repair obligations

If you sign your lease at the beginning of your tenancy and it has a ‘Full Repairing and Insurance’ (FRI) clause, it is your responsibility to ensure that, at the end of your lease, the premises is returned to your landlord in ‘good condition’. Your landlord may serve you with a Schedule of Dilapidations, outlining what work you need to complete to return the building to this state; this will be at your own cost. It is, therefore, important to prepare a Schedule of Condition (SoC) at the beginning of your lease, to help verify what work needs to be done at the end of your tenancy.

6) Your deposit should be returned

If you have paid your rent promptly, fulfilled all your repair obligations and do not owe your landlord any other outstanding sums of money, you are legally entitled to ask for your deposit to be returned. Most commercial leases suggest that the landlord can return it in a ‘reasonable manner’, which may be too vague to satisfy some tenants who may need the money for other matters. It’s therefore, important that your lease implicitly states when you can expect to receive your deposit back.

You will have many things on your mind when your commercial lease is coming to an end, and it’s natural that some may slip your mind. It’s important then, that you seek professional help and advice to avoid any legal or financial slip-ups. Here at Eddisons, our team has many years’ experience of dealing with the end of commercial leases, and can offer you guidance on the best way of approaching the situation.

 

Written by: Steven Jones on Thursday 19/01/2017

 

Understanding commercial rent review disputes and the Calderbank Offer

Understanding commercial rent review disputes and the Calderbank Offer

 

In the course of commercial property letting, it is sometimes inevitable that a dispute may arise regarding the rent – either from the side of the landlord or the tenant. We examine the most famous rent dispute in an effort to understand how such disagreements can be resolved.

What is a Calderbank Offer?

A Calderbank Offer is an offer made ‘without prejudice, save as to costs’ in order to settle a dispute without incurring extra costs and the possibility of a full trial. The term stems from a divorce case in 1975 in which the judge decided that in a case of litigation, where the winning party has refused an earlier settlement, the losing party may present the details of the offer as evidence towards costs.

The implications this has in commercial property rent disputes are that if the winner of such a dispute is awarded less costs than was previously offered, the losing party may be able to pay a reduced amount of costs to the winning party.

How does this affect commercial property rent review disputes?

Rent reviews can be a bone of contention between landlord and tenant. They typically take place every three to five years – historically this period of time was seven or 14 years. However, with the shorter terms of modern commercial leases, usually between 10 and 15 years, rent reviews now occur more frequently.

The rent review clause in the lease will set out when the reviews will take place and how the new figure will be arrived at, what procedure will be followed and how any disputes, if any, will be dealt with. The most common method of recalculating a commercial rent is revaluation in the open market.

The Royal Institution of Chartered Surveyors (RICS) publishes a voluntary Code for Leasing Business Premises in England and Wales which aims to promote the values of fairness and negotiating commercial leases on the basis of informed choices, for both landlords and tenants.

The review will be based on the open market value of similar properties, on similar leases, in the local area. In some cases, the lease will stipulate that the rent will be increased, ‘upwards only’ which allows the landlord to increase it by the agreed amount. However, if, during the course of his or her research, the tenant discovers that the local market value is actually lower than the increase being asked for by the landlord, negotiations may take place.

This is where the Calderbank offer is of particular relevance to commercial property. If, during the course of negotiations, a tenant makes the landlord an offer of a reduced rent via a negotiator (usually an independent surveyor), in line with local market values and this is at first refused but then later accepted by the landlord, the tenant can use the first refusal both to argue their case and to claim any subsequent costs.

Commercial rent reviews can be fraught with difficulties and create an atmosphere of anxiety and disharmony between landlord and tenant. In order to avoid such a scenario it is essential that before the tenant signs the lease it is professionally examined to ensure that the clauses are fair and reasonable for both parties.

For advice and information on any aspect of commercial rent reviews, either from the perspective of a tenant or a landlord, contact the Eddisons team. Our highly-qualified, independent RICS surveyors have extensive and current experience on a wide range of matters relating to what can be a thorny issue.

 

Written by: Steven Jones on Wednesday 13/07/2016

 

Should a commercial landlord forfeit the lease when their tenant is in rent arrears?

Should a commercial landlord forfeit the lease when their tenant is in rent arrears?

 

Being a commercial landlord undoubtedly has its benefits. However, there are times when a tenant either cannot or will not pay their rent. In these situations, the landlord has to consider whether to forfeit the lease. We look at the circumstances surrounding forfeiture and ask whether it’s always best to forfeit.

Forfeiture

The word ‘forfeit’ comes from the Middle English via Old French, and means a crime or transgression which must be made good with a fine. Today, if a commercial tenant is in rent arrears the landlord is entitled to forfeit the lease before the lease’s specified termination date, without recourse to the courts. However, the landlord does not have an automatic right to do so – the right to forfeiture must be specified within the clauses of the lease.

If the lease does contain a forfeiture clause, it usually allows the landlord to begin the forfeiture proceedings within a specified period – typically 21 days after the amount of rent is payable. If the tenant has not paid by the specified time, the landlord then has the right to enter his or her property by peaceful re-entry and forfeit the lease. Most landlords use Enforcement Agents who act on their behalf to ensure that proceedings are carried out correctly – they also have the authority to change any locks on the premises and display relevant forfeiture notices. If a tenant refuses to leave, the landlord can apply to the court for possession of their property. The result of forfeiture is that the lease is considered to have ended from the date of the act of forfeiture, and that any obligations which the landlord had towards the tenant will cease from that date.

The landlord must take great care not to waive their right to forfeiture, if that course of action is decided upon. Waiving their right is defined as doing something that acknowledging that the lease still exists, such as demanding the outstanding rent, or accepting rent payments after the period of time that enables forfeiture to arise.

For tenants, a right to apply for relief of forfeiture exists. This will usually be granted if the full amount of arrears is paid, together with the costs of any proceedings.

The landlord’s dilemma

Sometimes, however, landlords must ask themselves whether forfeiture is always the best course of action. It’s not uncommon for tenants to be affected by the supply/payment chain, especially in today’s financial climate, and for the non-payment to be only a temporary situation. For repeat ‘offenders’, however, the latest missing rent payment may be the straw that broke the landlord’s back, as it were.

Landlords must also question the viability and expense of sourcing a new tenant after forfeiture has taken place. Are they willing to have an empty property with no rental income for however long it takes to replace the tenant?

One possible solution is for the landlord to use the Commercial Rent Arrears Recovery (CRAR) process, whereby a Certified Enforcement Agent (formerly called a bailiff) recovers any arrears. This enables the tenant to continue in the property and means that the landlord doesn’t suffer financially through having an empty property or by having to find new tenants.

If you need advice or information on any aspect of forfeiture our skilled and highly-qualified staff can guide you through the process to ensure that the course of action you take is the correct one for you.

 

Written by: Steven Jones on Monday 11/07/2016

 

Lease Accounting Rule Changes Tipped to Bring $3bn onto Company Balance Sheets Worldwide

Lease Accounting Rule Changes Tipped to Bring $3bn onto Company Balance Sheets Worldwide

 

As much as $3 billion could soon be added to the balance sheets of companies around the world as a result of changes to international accounting rules.

The International Accounting Standards Board (IASB) is in the process of overhauling its rules relating to leasing commitments, including those linked to commercial property, and the result looks set to be some very significant additions to the balance sheets of thousands of businesses.

Having recently published a new set of International Financial Reporting Standards (IFRS) in relation to leasing deals of all kinds, the IASB has explained that its aim is to improve transparency in these contexts in more than 100 countries worldwide.

Until now, rental deals and other leasing liabilities have not needed to feature on company balance sheets but that is set to change and the figures that are to be newly-disclosed look likely to be very large indeed in many cases in the UK, across Europe and on a global basis.

“These new accounting requirements bring lease accounting into the 21st century, ending the guesswork involved when calculating a company’s often-substantial lease obligations,” said Hans Hoogervorst, the IASB’s chairman in a statement.

“The new standard will provide much-needed transparency on companies’ lease assets and liabilities, meaning that off balance sheet lease financing is no longer lurking in the shadows. It will also improve comparability between companies that lease and those that borrow to buy.”

It’s understood that retailing companies, who often lease premises on a considerable scale as a routine part of their operations, could be among those most acutely impacted by the ongoing regulatory overhaul.

The changes aren’t expected to directly impact the cash flows of any companies regardless of the scale of their relevant liabilities but companies are nonetheless being encouraged to understand more about their own position with respect to large-scale leasing deals of all kinds.

“There is much work for companies to do to understand and implement the changes, not least in the area of data collection, and this work should be started sooner rather than later,” said Nigel Sleigh-Johnson from the Institute of Chartered Accountants in England and Wales (ICAEW).

 

Written by: Paul Gagan on Tuesday 19/04/2016

New Commercial Property Lease Accounting Rules ‘Could Add £200bn to British Balance Sheets’

New Commercial Property Lease Accounting Rules ‘Could Add £200bn to British Balance Sheets’

 

Changes to the accounting rules around commercial property leases could see as much as £200 billion added to the balance sheets of British companies.

That’s according to recent research that suggests newly introduced adjustments to accounting regulations could have a heavy impact on some of the UK’s biggest companies.

At the heart of the matter are new rules currently being phased in by the International Accounting Standards Board (IASB), which will soon oblige British companies to recognise all their commercial property lease liabilities on their balance sheets.

The new rules are being framed as a drive for greater transparency and companies have three years to comply with the relevant regulations which were officially introduced in early 2016.

Figures compiled in line with International Financial Reporting Standards (IFRS) indicate that somewhere close to 85 per cent of all lease commitments in the UK are not currently detailed on company balance sheets.

All of which could see British firms needing to add in the region of £200 billion worth of property lease assets to their balance sheets before the end of the decade, it has been claimed.

“Under the new rules, occupiers with large portfolios of leased assets will see a significant increase in their balance sheet. The changes have been brought in due to a lack of transparency and comparability,” explained Paul Fry from the property consultancy behind the research on the subject.

“The information on operating lease liabilities currently declared within financial statements is insufficient for analysts, credit rating agencies and investors to be able to draw a clear picture of a company’s financial health,” he added.

Among the companies expected to be most significantly impacted by the accounting rule changes are retailers who typically operate with relatively slender profit margins.

Tesco, the UK’s largest supermarket chain and grocery retailer, could apparently see its net debt increase from around £8.6 billion to £17.6 billion over the next three years as a result of the adjusted rules on property lease liability reporting.

“The new regulations mean it is imperative that companies maintain detailed records for individual leases,” noted Hannah Coleman, from the firm behind the recent research.

“Corporate Real Estate teams can also expect greater focus from the wider business on property strategy and the negotiation of lease terms.”

The new rules are being framed as a drive for greater transparency and companies have three years to comply with the relevant regulations which were officially introduced in early 2016.

 

 

Written by: Steven Jones on Friday 18/03/2016

 

Can you negotiate a commercial lease?

Can you negotiate a commercial lease?

 

Whether you’re setting up in business for the first time or are looking to expand into larger premises, the process of negotiating a commercial lease can be fraught with difficulties. We look at the most important points to consider and ask whether it’s possible to negotiate a better deal for yourself.

Lease length

Depending on the nature of your business, the length of the lease you require will vary. Typically, retail leases extend to around 10 years, while office space leases begin at five. However, leases can also run from one or two years up to 25. If you’re interested in long-term stability for your business, negotiate the amount of time you feel is appropriate.

A break clause is also important to consider. These usually come into effect at around three to five years. If you do break before the agreed length of time of the full lease, you will still be liable to pay stamp duty, regardless of any break clauses.

Renewals

The Landlord and Tenant Act (1954) gives you the right to choose whether to have the right to automatically renew your least at its expiry, or to be excluded from such protection. If long-term security it important to you, make sure that you have a renewal right written into any contract you sign.

Rent

If your lease is longer than five years your landlord may require a rent review after this period. Some may even seek a review after as little as three years. Examine the lease carefully to see what terms the landlord imposes. Depending on market conditions, it may even be possible for you to negotiate the rent down rather than up!

Also consider asking for a rent free period at the start of your contract – this initial period is where most financial cost is incurred and a couple of months without the additional burden of rent may be the boost your business needs. Because he or she won’t have to pay business rates during this time, your landlord may look favourably on this suggestion too.

Repair costs and service charges

Carefully check the lease for ‘full repairing and insuring’ terms which may mean that you’re responsible for making extensive repairs, the benefit of which you may not fully see if your lease finishes soon after. Clearly, it’s important to maintain the property to a good standard but, in cases where the landlord is responsible for maintaining the exterior of the building, you should also be wary of incurring extra service charges they might want to pass on to you. Try to limit these to routine repairs and maintenance as opposed to structural repairs.

A commercial lease is a complex document and it’s vital that both tenant and landlord get it right. It should be clear and set out precise legally-binding obligations in order to achieve peace of mind for both parties. And while it’s possible that you can negotiate on your own behalf, if you have any doubts whatsoever, it’s always advisable to seek clarification and guidance about your legal position. That’s where our team of experts come into their own. Eddisons can offer you advice, interpretation and general guidance on all aspects of negotiating a commercial lease to help your business prosper from the outset.

A commercial lease is a complex document and it’s vital that both tenant and landlord get it right.

 

Written by: John Padgett on Friday 19/02/2016

 

Landlords VS Tenants: Who is responsible for maintenance?

Landlords VS Tenants: Who is responsible for maintenance?

 

When embarking upon a new commercial property lease, one of the many considerations is the maintenance obligations stipulated within it. As opposed to domestic tenancy agreements, commercial leases tend to place significantly higher levels of responsibility onto the tenant rather than the landlord.

Section 11 of The Landlord and Tenant Act 1985, pertaining to the leasing of property to domestic tenants, stipulates that it is the responsibility of the landlord to keep the property in a good state of repair. The onus for maintenance being on the landlord in domestic properties however is not reflected in the vast majority of commercial leases. For example, it is the legal duty of the commercial tenant, not the landlord, to carry out a health and safety risk assessment in accordance with The Health and Safety at Work Act 1974 and incur any costs attaining to that. This must include the tenant having responsibility for fire safety, the safety of electrical equipment, gas safety, managing asbestos and providing safe and comfortable working conditions.

Little else is proscribed legally, but the majority of commercial leases are classified as ‘Fully Repairing and Insuring’ (FRI Leases). FRI Leases hold the tenant liable for all maintenance and insurance costs from the commencement of the lease. It is then the tenant, and not the commercial landlord, who is responsible for ensuring the property is fully compliant with building regulations, health and safety legislation and for the general every day maintenance of the property.

The commercial landlord, however, is not omitted from all maintenance responsibility. In many cases, unless the tenant is the sole occupant of a building, the commercial landlord may retain some, or all, responsibility for the maintenance of common areas and, in some cases, for the exterior of the property. In many cases commercial landlords are also responsible for aspects such as the safety of the premises’ wiring system etc.

If alterations are to be made to the premises (for example, to bring the building fit for the purpose of the commercial activity), the tenant is also liable for these costs under the terms of a standard FRI Lease. In many cases the terms of the lease will state that permission must be sought from the landlord. However, in this case, there is legal precedent for the reaction to this request. The Landlord and Tenant Act 1927 (Part I) states that if permission is to be sought for alterations, then the landlord cannot withhold their consent if the request is reasonable (although note that this is not the case under Scottish law). The Act also states that in cases where there is an absolute prohibition in the lease of alterations being made to the property, then the tenant has the right to apply (under section 3) to the landlord for permission and then be compensated at the end of the term.

One clause to bear in mind when making alterations to your commercial property under an FRI Lease is that, under many standard terms, the tenant may be liable for any dilapidations to the property at the end of the lease term, i.e. any costs incurred in returning the building to its original state. Dilapidations can be due not just for alterations but also for any repairs and maintenance that have not been carried out by the tenant. To avoid the potentially damaging repercussions of extreme dilapidation charges, it is advisable to enlist the services of a chartered surveyor to make a full assessment of the state of the premises at the commencement of the lease and also to keep a full schedule of maintenance and proof of any repairs carried out.

However, if the terms of a standard FRI commercial lease appear off-putting to a new business owner, then there is some light at the end of the tunnel, as many aspects of an FRI Lease are negotiable. For example, if at the commencement of lease negotiations it is discovered that the property is not in an acceptable condition for tenancy, it is possible to insert covenants into the lease to protect the tenant against future repair or dilapidation costs. For instance, certain areas, e.g. the roof, could be removed from the maintenance and repair obligation. Alternatively a schedule of condition could be annexed to the lease showing the state of the premises at the date of entry and specifying that the premises will be returned in no worse, but no better, condition at the end of the lease. It may even be possible to exclude from dilapidation costs anything that could be classed as fair ‘wear and tear’.

In all cases requiring a commercial lease it is best practice to have an expert legal team advise both the tenant and the landlord on the exact terms to ensure that both parties are justly represented. Specialised lease advisory teams, such as Eddisons, have extensive experience in all aspects of commercial property contracts and can provide invaluable support and advice.

The onus for maintenance being on the landlord in domestic properties however is not reflected in the vast majority of commercial leases

 

Written by: Steven Jones on Wednesday 20/01/2016

Manchester has the highest office rent costs outside of London

Manchester has the highest office rent costs outside of London

 

Owing to sky-high demand, the average rent for office space in the heart of London has reached £55.34/sq. ft. This has left many enterprises searching for commercial space in other metropolitan cities, one of which is proving to be particularly popular – Manchester.

With commercial space in Manchester now costing double of that available in Liverpool, it is now the most expensive city in the UK behind London in which to lease an office. The city has emerged as a veritable economic hub in recent years; the BBC’s decision to move northwards to MediaCity UK has regenerated the Salford Quays area, and many major corporations such as Thomas Cook, Guardian Media Group, ITV and Google now have a presence in the city.

The arrival of such powerhouse businesses has created a surge in demand for square footage, which has driven prices upwards substantially. It is now estimated that commercial space in Manchester is as much as 50 per cent more expensive than other northern cities. While “Northshoring” – or moving northwards to escape London’s high rates – was once a move conducted to save money, companies can now expect to pay like-prices to secure office space in Manchester.

Supply and demand in “Cottonopolis”

Manchester may have earned a reputation for it’s cotton mills and industrial production in the 19th century, but today, the city is a vibrant hub of tourism, commerce and media.

With companies such as Etihad Airways adidas and Siemens having their European headquarters here, the commercial landscape of the city has been dramatically altered. The average price for office space now sits at £32/sq. ft., although market analysts predict it will reach as much as £34/sq. ft. by the year’s end. Other analysts have revealed that demand for office floor space in Manchester has risen by as much as 166 per cent, and given that this interest from prospective occupiers and investors currently outstrips the supply, it is easy to see why prices continue to rise.

Manchester isn’t the only city outside of the capital commanding higher rates; in Birmingham, businesses can expect to pay an average of £31.50/sq.ft, while those in Aberdeen will pay on par with those in Manchester, parting with £32/sq. ft.

However, it’s not all bad news for businesses; for companies looking for a less expensive alternative north of London, Liverpool remains a viable option, with the rental rates for office space just over half that of Manchester at just £18/ sq. ft.

 

Written by: Steven Jones on Wednesday 04/11/2015

 

Five things to look out for in a commercial property lease

Five things to look out for in a commercial property lease

 

Entering into a commercial property lease is a weighty financial commitment, and so ensuring you understand all aspects of your obligations is of vital importance.

Complications can occur if you do not know what to look for in the lease, if you do not understand certain parts of it, and you do not hire a chartered surveyor to translate potential risks to you. Your RICS surveyor will be able to answer any questions you have, but in the meantime, here are five things that you should look out for if you are serious about signing a commercial property lease:

Understanding the lease terminology

Use the expertise of your chartered surveyor and lawyer to make certain that you fully grasp the terminology within the lease. Doing this will reduce the risk of any legal surprises from the lease and allow you to protect yourself if the Landlord attempts to break the terms in any way.

Stamp duty

The length of the lease can vary depending on the property, but commercial leases typically range from five to 10 years. However, some can have a break clause inserted, which allows businesses to take a break to evaluate certain decisions such as relocation, upsizing or downsizing, and more. However, stamp duty is payable for the length of your tenancy regardless of whether you take a break, and so you should take that into account when signing the lease.

Is the lease realistic to your business?

Prior to signing the lease agreement, you should take a serious look into your company’s finances and assess whether projections of growth are realistic. You need to be confident that your business will be able to generate enough to pay the rent for the full length of the lease, but this can work both ways; your company may grow at a faster rate than you were expecting for example, and the premises may no longer work for you. A short-term lease with renewal options may be preferable if your initial projections of growth are incorrect.

Your obligations as a tenant

Most commercial leases tend to favour the landlord, so make sure you work out what you will and will not be responsible for in terms of maintenance and repairs. For example, if you have to make any alterations or repairs, you need to ensure you have capital set aside to cover this, and you should check the end-of-lease requirements as well to see if you will be liable for any replacements or refurbishments before you leave.

Utilities and taxes

In some cases, the Landlord will pay for any utilities that are not metered and then bill you accordingly or you will have to pay. Although reading the lease in detail can be time-consuming if not confusing at times, it can save you from incurring future charges from utility providers and the council. Ensure that you are fully aware of what utilities and taxes you are directly paying and the providers so that you can have access to the accounts to complete the payments.

 

Written by: John Padgett on Thursday 27/08/2015