December e Newsletter

Editorial
This is our final e newsletter of 2010 and it brings to an end our 12 Q&A’s which highlighted some of the events found in the life of a commercial lease. Rest assured we will continue with this feature and focus on other areas that people may find of use.

It seems that 2011 will be as much a challenge as 2010 with the possible introduction of new accounting rules, certain changes to the uniform business rates and the beginning of ‘Localism’. We take a quick look at all of these in this issue. We also look at the Snow Code and a quick look at a recent survey of business sentiment. Many of the smaller firms are in better shape as a result of the recession which can’t be bad.

Finally, from all of us at TAP we would like to wish you all a very Merry Christmas and Happy New Year.

1. Lease Accounting; leases to face radical new approach

The International Accounting Standards Board (IASB) has recently published its ‘’Exposure Draft’’ (ED), something it has been working on since 2006, in an attempt to harmonise accounting practices.

If the proposals are adopted there are likely to be profound implications for lessee’s financial statements in the manner in which leases are accounted for on a Company’s Balance Sheet, plus additional burdens in regard to data collection, controls and processes. A further knock-on effect is likely to be in key company performance metrics, i.e. asset turnover ratios, return on capital and debt to equity ratios.

At high level, and for certain companies, it may even result in assessing the merits of owning real estate rather than leasing it, and even if leasing were continued, the likelihood is that shorter leases are favoured, as the accounting impact reduces in line with shorter lease terms.

So, what are the major changes that the IASB are proposing?

Fundamentally, all leases are to be accounted for on the balance sheet, showing that the ‘’right of use’’ creates an asset and the obligation to pay rent creates a liability. Current procedure has it that neither assets nor liabilities are recorded on the balance sheet, that Rent is an expense in the Profit and Loss Statement and that minimum future lease payments are disclosed. Rent and its escalation, will have to be accurately profiled throughout the lease term which may lead to increased reference to recognised indices (i.e. RPI) or by adopting fixed stepped increases, rather than open market rent reviews, in order to negate the need for forecasting, thus avoiding accounting variances.

Initially, there will be onerous data collection requirements, especially for businesses with multiple leased assets, which may well require external advisors to assist. Whilst timings of implementation may not take effect until January 2013, there will be a need to re-state prior year figures in which case prudent businesses would need to introduce preparation systems during the course of 2011, to cater for opening balances for accounting periods starting on or after 1st January 2012.

TAP is not qualified to advise on the intricate details of the proposals although, as a lessee, you are encouraged to contact your Accountant about the scope of the changes, but suffice to say that, if implemented, they are radical enough to effect business behaviour and will add, initially, a further layer of administration, and potential cost, to businesses operating under property leases.

2. Lease terms favour the landlord despite business sentiment being low

New evidence indicatesthat whilst SME's business confidence is still low, the length of newly agreed lease terms seems to be growing.  During 2009 lease lengths and incentives reached a low point but since then lease lengths are beginning to rise.

The figures of the recent survey were presented by Malcolm Fordsham, Director of Research at IPD. It was stated that new leases are now longest in the retail sector, averaging 14.8 years (excluding break clauses), followed by industrials on 12.2 years and offices at 8.8 years. At the same time incentives seem to be reducing, which is not surprising. Mr Fordsham commented “The average rent free period for offices is now about 15 months, but City offices averaged 27 months for the first half of 2010”. The size of fall can only be realised when compared to the length of rent free periods in Q2 & Q3 in 2009 where in some cases, there were rent free periods amounting to 46 months.

Lease renewals have also strengthened over the last 2 years with strong growth in the retail and office markets. However, the outlook may not be so rosy when you consider the recent SME survey conducted by QBE where it’s suggested 74% of UK SME’s expect it to be 2 years before they see a full economic recovery. Half of the SME’s questioned felt the 2.5% increase in vat will have a negative impact on their business and SME’s are unlikely to come to the aid of the unemployed public sector workers with only 17% expected to recruit during 2011.

Overall, although the business sentiment may be low, 54% felt their business was in better shape and more resilient as a result of the recession, so confidence maybe returning.

3. The rising cost of small vacant space........

The ability to benefit from a business rates relief in small vacant properties is likely to expire at the start of April 2011. The Rateable Value threshold was increased from £2,600 to £18,000 for the year 2010 – 2011 to help small occupiers overcome the financial burden of holding their space vacant.

With the threshold at £18,000 any vacant properties with a rateable value below this have been exempt from paying business rates. However, the Government now believes that returning the threshold back down to £2,600 will save them approximately £400 million per annum.

Liz Peace, Chief Executive of the British Property Federation said “If the government is pinning its hopes on a private sector led economic recovery then this is a damaging and retrograde step.

“Empty rates is a tax on hardship at the worst possible time. The majority of the properties affected by this announcement will be in areas that are already economically disadvantaged, and so this will be a further blow.”

The reinstatement of the £2,600 threshold will place a greater financial burden on those companies who currently benefit from the higher threshold relief however we understand there may be some active lobbying against this move which may lead the Government to water down the proposals. It will be interesting to see what may come of these changes especially as the Government has always stated the significance of an SME driven boost in the UK’s economic recovery.

4. Snow – Do we really need telling?

The unexpected snow fall this side of Christmas has caught many of us off guard but now it’s here, and with more predicted, do any of us know of the ‘Code’? The Government has issued a ‘Code’ which gives guidance on how to clear pavements and paths.

The Code can be found on http://www.direct.gov.uk/ although the home page isn’t that helpful and you may be better entering ‘Snow Code’ into a search engine, such as Google or Bing. This will take you straight to the right page.

The main elements the Government suggest that a considerate occupier should do are: -

1. Clear the snow early in the morning as this prevents it from becoming too compacted.
2. Use salt or sand and not water to melt the snow.
3. Be careful where the snow is moved to.

This website does not just contain information about how to clear your path; it also facilitates access to your local authority which enables you to review their policy on pavement and road gritting/clearing. So in the City of London, for example the roads and paths are cleared by the Cleansing Department!

On the face of it the information borders on common sense but as a portal to understand how your local authority approaches this problem, then it may be useful.

5. Localism – What does it mean?

The Government has this week issued its Essential Guide to the Localism Bill and describes how it proposes to make the shift of power from a centralised state to local communities.

More than half of all government spending in our cities, towns and counties is ring-fenced, which means that while it is spent locally, what it is spent on is dictated centrally. The sums of money spent in this way are huge, for example the total annual spend in Birmingham is £7.5 billion, in Kent it’s approximately £9 billion and in Greater Manchester and Warrington it’s £22 billion. Much of the money earmarked for expenditure in this way is spent on social security, health and education. This localism approach strongly suggests the money can be better spent under local control and so the Government has outlined 6 essential actions that will assist in delivering this change in direction: -

1. Lift the burden of bureaucracy

2. Empower communities to do things their way

3. Increase local control of public finances

4. Diversify the supply of public services by ending public sector monopolies

5. Open up Government to public scrutiny

6. Strengthen accountability to local people

For property, this will result in more local benefits arising from large developments, for example, changes to the "community infrastructure levy"( charges that local councils impose on developers). Now developers will be required to make contributions towards local infrastructure. With regard to the granting of planning permission more autonomy will be given to the local community who can, where the support is greater than 50%, push through planning proposals that may otherwise have been resisted in the past.

This Localism Bill is a complete change to Government’s existing approach and, as with substantial pieces of legislation, the devil will be in the detail but for the time being if it delivers savings by streamlining bureaucracy then it can only be beneficial to the country. Let’s wait and see.

Q and A – Relax; your lease has expired, or can you...?

So your lease is coming to an end and you’re moving on to new premises. What do you need to agree with your landlord? You certainly do not have to agree when your liability to pay rent, service charge, business rates and utility liabilities ends as these will be determined by your lease. Assuming you are not ‘holding over’ then your lease will expire in accordance with its express terms.

That leaves just one remaining element, Reinstatement and a potential dilapidations claim. To follow the prescribed route will be complicated as it will rely on a thorough knowledge of the various references to legislation and case law, such as the Landlord and Tenant Act 1927, in particular s18 (1), and if you are prepared to defend your position, and on occasions this is the right thing to do, then you will need to engage a competent surveyor to act on your behalf. A surveyor specialising in dilapidations will approach the situation by looking at the lease (tenant’s repairing covenant), consider the licences to alter and maybe Schedules of Condition, agent’s original particulars, rent deposit deeds and possibly any deeds of variation. This will help him build up knowledge of a tenant’s responsibilities to maintain and repair the premises that they have been using.

As a tenant you may not want to become embroiled with a discussion on all these and would much prefer to avoid a long and protracted negotiation. If that is the case many tenants opt for negotiating a settlement based on a priced schedule. This is by far the easiest way but you will need a priced schedule so you may have to wait for this to be formally served on you by your landlord. Timing may be an issue as the landlord can serve this on you in the last week of your term so you may wish to request the document earlier.

It is normal for this Schedule to include costs for the rent and service charge for the duration of the works as any remedial repairs will undoubtedly be undertaken after the lease has expired. Once received then you may wish to open up discussions on a settlement.

However, should you wish to undertake your own works then a tenant would be prudent to have these carried out during the period of the lease but remember this will involve liaising with the building’s management to obtain the right permissions and permits to work. Think about what impact this may have on your fellow occupants if you’re in a multi-occupied property as this may increase the works programme.

There are one or two aspects which are important to note about dilapidations; the future use of the property and do you, as a tenant, have an ability to undertake the works after the lease has concluded. The first aspect relates to whether the property is likely to be the subject of a substantial redevelopment and this may make the dilapidation claim void.

Landlords won’t always be able to secure a successful dilapidation claim if it can be shown the property is going to be the subject of a substantial refurbishment or development. Secondly, a tenant isn’t permitted (unless it’s agreed with their landlord) to carry out the works after the lease expiry.

For an occupier it can seem unwieldy when a lease expires and you receive a detailed Terminal Schedule of Dilapidations; so be prepared for when it arrives. Remember this can arrive at any time before the lease expires so it may be prudent to request this Schedule at least 6 months before expiry.

November e newsletter

Introduction

As the year draws to a close we take a look at how the Carbon Reduction Commitment Energy Efficiency Scheme has been modified from an incentivised ‘cap and trade’ scheme into something resembling a green tax. We highlight the reduction in service from the Essex Fire Brigade following the Coalition Government’s comprehensive spending review and also look at how the Better Building Partnership (BBP) is looking to collaborate with occupiers to deliver more sustainable buildings.


Are you ready for the festive shut down? If you approach it sensibly it could save you money and give you peace of mind. We also take a quick look at the January increase in VAT, and finally we look at why we believe you should work with your landlord, in our Q&A.


''For a current update film on CRC and necessary behavioural change,from leading UK influencers, go to... Property Week [PW.cffnbzelmoqwzqmecoz@propertyweek.ubm-info.com]''


Major adjustments to CRC by Coalition’s CSR

The Government’s Comprehensive Spending Review (CSR) has introduced fundamental changes to the way the Carbon Reduction Commitment Energy Efficiency Scheme (CRC) is administered, which will have cashflow and timing implications for both Landlords and Tenants.

In its simplest form, the impact on business will be postponed, as the 2011 allowance sale (for 2011-2012 emissions) will now not take place until 2012.

The second fundamental change is that the revenue generated from such sale will now not be recycled to participants but will be retained by the Exchequer, thereby effectively switching the scheme into a Green Tax. The original legislative net which was used as a driver towards less energy consumption contained an opportunity for reward for lower usage plus positive PR benefits but no longer…the Scheme’s simpler format now just looks like additional cost to participants. The League table,however does remain so this still offers a reputational incentive for businesses.

And this cost looks like arriving during 2012 and may appear as a ‘double-whammy’ as participants will have to buy their 2011-12 allowances plus those for anticipated usage during 2012-13.

Uncertainty still remains as to a Landlord’s ability to pass on certain CRC costs to Tenants and as before, much remains enshrined in the wording of existing leases, plus the ability of parties to agree suitable wording in new leases. Now that CRC more closely resembles a tax, it seems that in those buildings where the landlord procures power and recharges the tenants, he may be able to obtain CRC cost repayments too as part of a Tenant’s covenant to pay all outgoings(including taxes). Tenants will no doubt try to argue against this being seen as a Tax, and indeed if a Landlord requires additional allowances he will be forced into the secondary market to buy more, which, in itself does not resemble a tax.

If the balance of power is now drifting towards Landlords, we wonder what implications there are for new leases where a Tenant may be shortlisting very similar buildings but due to the difference in ownership structures between landlords, one may be looking to the tenant to pay CRC costs, whereas another may not be even falling within the range of the CRC regime at all. The impact could, therefore be felt by small as well as large occupiers, and noteably, if a non- CRC Landlord sells to a CRC one, the impact for the occupants could be very real.

The Government has now called for a period of Consultation on the subject until December 17th 2010.


Fire brigade no longer responding to business alarms

Fire fighters in Essex have confirmed that they will no longer respond to automatic alarms from business premises or from calls from telephone kiosks that are abandoned.

They say that this is because some 97% prove to be false alarms and they want to ensure that their operational resources are deployed more effectively.

Essex’s Chief fire officer said that taxpayers should no longer bear the cost of businesses failing to maintain their alarm systems and that there exists a greater need to have teams ready to respond to real emergencies.

This clearly illustrates the need for landlords, property managers and occupiers to undertake the necessary and regular checks on the systems that their manufacturers require.

Outside of Essex therefore, parties responsible for the building’s system, should also check with their local fire authority to understand upon what basis a fire crew will attend an alarm call out.


Better Building Partnership Forum 2010

On November 10th, TAP attended the BBP Forum 2010 which was entitled ‘Owner Occupier Partnerships-Panacea or Impossibility?’

The BBP is a collaborative organisation made up of some of the largest commercial and public property owners in London, and, as their mission statement sets out..’’All members are working together to improve the sustainability of London’s existing commercial building stock and accelerate the reduction in CO2 emissions from those buildings’’.

The Forum addressed 3 topics which were attended by all participants in rotating groups; they were

1. Sustainable Retrofit, energy performance contracting in multi-occupied buildings

2. Transactional and Letting Agents; a key role to play in promoting sustainability to both owners and occupiers?

3. Owner Occupier partnerships; what can realistically be achieved?

In brief, the messages from each were as follows:

1. This follows a model in contracting with ESCOs (Energy Servicing Companies) and participants should view them as an ongoing service rather than just a cost item; they need simplification and to become an industry standard with a recognised seal of approval; but at a primary level there still needs to be co-operation between Landlord and Tenant, as a Landlord cannot simply compel a Tenant to make building or spacial improvements. The Forum concluded that there would always be an issue when talking about ESCOs in buildings with short lease terms remaining.

2. Agents knowledge was deemed to be poor and lacking in detail of issues facing both Landlords and tenants. Few, if any firms were educating agents sufficiently, enabling them to guide clients in matters of sustainability with most agents still focusing on the 3 Heads of Cost (i.e. Rent, Rates and Service Charge). There were regional differences noted with London tending to fare better. The BBP saw fit to provide Tool Kits and a Charter for their agent members to adhere to.

3. There were barriers to overcome, namely Who pays, who benefits, Trust, Interests not being aligned, lack of common language, education, how to treat existing lease agreements, is the financial prize worth the effort and the supply chain .i.e. is the property manager meant to be undertaking much of this work?

As a general summary of the event, it seems that many sustainability issues are still out of sight and out of mind and the BBP will continue to see itself as one champion in the mission to better broadcast these important messages. They conclude that they need more Forums, to engage with more occupiers, to produce more Tool Kits, to highlight more case studies and to make more interactive use of their website.

There is clearly still a long way to go to affect behavioural change in this area.


Festive shut down – How prepared are you?

For many us we look forward to the festive period with delight after a long and often challenging year, and that can mean we shut and lock the door on Christmas eve and hope nothing happens while we’re all enjoying the annual celebrations. However, as a company, what contingency is in place should something happen? Does the property manager or your landlord have your contact details? Where is your business insurance policy? Have you turned off all non-essential equipment?

Many of these questions you may think are common sense but you would be surprised how many businesses are not prepared for this eventuality. It is also important to appreciate that in the winter with much colder weather, the chances of potential accidents relating to burst water pipes or electrical faults can be higher than other times of the year.

In many multi-occupied properties the landlord or property manager will have in place some form of security cover and this may involve a red care security alarm with a telephone link to a monitoring station, periodic patrols by a security firm or constant 24hour security presence. In each situation should an incident occur it may result in the need to have up to date contact details. Not only is it important for an occupier to pass on their key holding information but it will also be important for an occupier to know how they can contact their landlord or property manager.

However, an occupier may want to use the services of a key holding company who, as the title suggests, can hold a set of keys on behalf of the occupier and it is they who will be called first in the event of a problem. Costs for such a service would range between £350 - £750 per year and would depend on where your office is located.


VAT – When does it increase?

Following the Coalition Government’s Comprehensive Spending Review, VAT is set to increase early 2011; any invoices raised on or after the 4th January 2011 will attract the new level of VAT. This is the third time in as many years that changes have been made to the level of VAT with the rate reducing in 2009, returning to its original level in 2010 and, now at the start of next year, increasing to 20%.

The rules surrounding when and how much VAT to charge are complex at the best of times and so when there is a change in rate or circumstances then interpretation can prove even more difficult. However, in simple terms if you’re a retailer and you sell an item on or after January 4th then the new 20% rate would apply, however, should a customer take delivery of an item before this date and an invoice is raised after January 4th then the supplier can apply the lower rate of VAT.

This is only a simple example that shows it is not straight forward and so we have found the easiest place to look, should you not have access to an accountant, is HM Customs & Excise (www.hmrc.gov.uk/vat and then search under ‘rate increase’). This will provide you with simple details on how to interpret the rate changes.


Q&A As a business,how important is it to work with my landlord?

Traditionally the relationship hasn’t always been co-operative between the landlord and the tenant despite the obvious benefits that can flow from having such a good understanding of one another’s needs. Trust is at the heart of the relationship and is not always regarded highly enough. Over the years both tenants and landlords have gone to extreme lengths to hide aspects from one another about what each party wants from a property but of late this is changing.

Combining the downturn in the economy, the general decline in lease term lengths and the common desire to see a more sustainable environment is, in our opinion, bringing landlords and tenants together. It is important to note that it is the landlord who has the opportunity to enhance the services on offer to a building, albeit with the co-operation of the occupiers. In answer to the shorter leases being offered and demanded , the opportunity for landlords and tenants to work together is becoming more relevant and this is happening.

Furthermore, with external factors such as increases in fuel prices and the emergence of green taxes, the need to enhance a property’s efficiency is no longer a luxury and more a necessity. Value for money can be demonstrated more easily now as financial benefits can be identified given the increase in technology versus cost of energy. The growing cost of supplying energy to a property is forcing more innovation and the need to form a better working relationship with your landlord is now essential.

Throughout the life of a lease an occupier will need to make changes to their demise, may even require to assign or sub let space or install equipment outside their demise and this will require co operation from the landlord. This co operation is based on honesty and trust and underpins a strong working relationship. It is now a requirement of both the landlord, tenant and property manager to be more accessible and open with each other and we would promote the need for an occupier,where appropriate to support this working ethos as it will benefit them in the long term.

October E-Newsletter

As we go to print people are still digesting the effects of the Coalition's spending review. It's almost certain evryone will have to tighten their belts accordingly. But spending isn't the only issue that needs to be considered and this month we look at how the annual business rates increase is calculated, whether you need to inspect your air conditioning before the end of the year and review the findings of Lord Young's recent report on using common sense when dealing with Health and Safety. Furthermore it pays to have the right waste disposal strategy as we take a look at the first prosecution under the WEEE Regulations.

Finally we look at break options in our Q&A as it's not as easy as just serving a notice!

Retailers lead the charge towards a revised Business Rates calculation

The British Retail Consortium (BRC) has been at the forefront of lobbying the Government over the methodology used in establishing the new multiplier base. Traditionally, the system uses September’s RPI to form the basis of calculation for the following April’s increases and, coupled with last April’s Revaluation, the BRC says that this could see some retailers facing uplifts of 22%.

Whilst the BRC have appeared most vocal, the RPI figure will have implications for all commercial Rates payers and may come as an unexpected shock for business planning. Hence industry bodies are urging Ministers to consider other methods that are not so random. Stephen Robertson, Director General of the BRC says .....’’ Basing a whole year’s rates bills on one, almost random, month’s RPI makes no sense. The Government must switch to another way for next April and beyond.

Using the Consumer Price Index (CPI), as it does for pensions is one option. Or using the 12 month average RPI rate from October 2009 to September 2010, which would iron out inflation rate volatility.’’

The Rate that has been chosen is 4.6% (down from 4.7 in August) and is still considered to be too high for comfort, with commentators expressing concern that the speed of reduction from early year highs has been ‘’stubbornly ‘’ slow.

The coalition Government has its hands full with its Spending Review, and therefore a fine balance exists between spending cuts and tax adjustments to keep companies/retailers competitive, but if the RPI remains high and is the primary link benchmark in this annual recalculation, you can expect bodies like the BRC to increase the volume. For this next Rates year, however it looks too late.

Stop gassing around and take note?

ATTENTION... to those companies that install, maintain or service stationary refrigeration, airconditioning or heat-pump (RAC) equipment that contains or is designed to contain ‘’F gas’’ refrigerants …you have a legal obligation to hold either an interim or full Company Certificate. Should you want to review the list of F Gases (ie HFC's) visit the defra website (www.defra.gov.uk/fgas).

It is an offence not to hold an interim Certificate NOW and a Full one by July 2011 and enforcement will be pursued by your Local Authority and The Environment Agency, both of whom will have a range of options at their disposal to protect the environment. This reflects the fact that these refrigerants have a very high global warming potential, which can be up to 3000 times higher than CO2.

To clarify who is affected: Any organisation that directly employs engineers to install, maintain or service RAC equipment that contains or is designed to contain F Gas refrigerants. This includes RAC maintenance contractors and installers, including sole traders and RAC end users and facility managers employing their own qualified staff to carry out these activities.

Air Conditioning Inspections - Have you thought about this?

Air conditioning systems can account for 50% of the energy used in a building, and having it inspected by an Energy Assessor can improve efficiency, reduce operating costs which inturn lowers carbon emissions. Already the Energy Performance of Building Regulations (EPBD) are in place to impose an obligation on the operator to carry out an inspection on larger systems, and the an inspection on larger systems, and the obligation on the operator to carry out an inspection on larger systems, and the smaller (12kW) systems will need to have been inspected by the 4th January 2011. Do you need to undertake this inspection?  

Where you have to undertake such an assessment an assessor will be looking to: -

• Provide details of the system
• Highlight where it is possible to improveperformance and reduce carbon emissions, which may involve replacing the equipment

As with all regulations it is important to understand how an air conditioning system is defined. It is defined as: -

“a combination of all the components required to provide a form of air treatment in which the temperature is controlled or can be lowered, and includes systems which combine such air treatment with the control of ventilation, humidity and air cleanliness”.

The cooling capacity of an air conditioning ‘system’is further defined as “the sum of all individual cooling units under the control of one building owner or operator”, and so the criteria of 12kW may result from having multiple split units.

The need to inspect the larger air conditioning systems is already established and as such many of the property managers have access to the right people, qualified to assist you in understanding your requirements to have your air conditioning system checked. Alternatively speak to the Chartered Institute of Building Services Engineers who will be able to put you in touch with an approved assessor.

 
 
Will common sense prevail?
 

 

Is common sense finally going to prevail in the world we live in? If Lord Young and the Coalition government get their way then this will certainly be the case. According to Lord Young's recent report entitled 'Common Sense Common Safety', he would like to move away from the current compensation culture and endorse a culture of using common sense when reviewing non hazardous occupations.

The aim of the Report is to ' ...... free businesses from unnecessary bureaucratic burdens and the fear of having to pay out unjustified damages claims and legal fees. Above all it means applying common sense not just to compensation but to everyday decisions once again.’ His recommendations, should they be adopted, are only directed at non hazardous occupations and Lord Young freely recognises that the current system with tight procedures and processes has resulted in the lowest number of non-fatal accidents and the second lowest number of fatal accidents at work in Europe.

Lord Young identifies that this overall compensation culture has resulted in companies operating their health and safety policies in a climate of fear. The no win, no fee approach to making a claim against an employer and the role of the press in highlighting the absurd health and safety rules has identified the role Health and Safety Executive (HSE) and Local Authorities have to play in promoting common sense. The Report proposes: -

• The HSE develop downloadable checklists to reassure organisations operating in low hazard environments that they are meeting their legal obligations and managing risk as so far is reasonably practicable.
• Introduce qualification standards for health and safety consultants as currently this is not a requirement.
• Where local authorities are overzealous towards health and safety, the public should be allowed an appeal process and appropriate recompense.
• The insurance sector also pays a part where the requirement of meeting obligations can be too much of a burden for small businesses or voluntary organisations. Lord Young has asked the insurance sector to look at this point.

There are other aspects of the Report which touch on the voluntary, home working and educational sectors which we won’t touch on but it seems that the willingness to promote a common sense approach is there, it’s now finding the will and way to achieve what many of us have wanted for a long time.

Waste Electrical and Electrical Equipment Directive (WEEE).... First prosecution

A hairdressing supplies wholesaler has become the first producer to be prosecuted for failing to comply with the WEEE Directive. The Birmingham based company was prosecuted for non-compliance with packaging waste regulations and also for failing to register as a producer of electrical and electronic waste. The company was found guilty of 31 charges in total (at £650 each) amounting to £20,150 plus compensation of £7,135 for loss of registration fees and costs of £3,605.

Electrical and electronic waste is the UK’s fastest growing waste stream and the aim of the regulations is to reduce the amounts going to landfill and improve recovery and recycling rates. Since the original packaging regulations came into force back in 1997, they have helped in doubling the amount being recycled annually and the Environment Agency estimates that this amounts to some 6.6m tonnes being diverted from landfill to recycling each year. In general terms, the regulations demand that companies who handle packaging as manufacturers, pack fillers, sellers, importers or leasing companies are registered each year and provide evidence that they have and will continue to recycle packaging.

Break Options - Are they easy to exercise?

Incorporating break options in a lease is customary, especially in these austere times, as it provides the flexibility a tenant or landlord may require when occupying or owning a property. For a tenant is offers the chance to increase or decrease the space they occupy and for a landlord it affords the opportunity to redefine a building’s configuration to take advantage of changing occupier requirements. But if you have the chance to break a lease it is essential to exercise it in accordance with the prescribed dates and covenants of the lease. This is both for the landlord and tenant. Think about these steps before a notice is served.

• Think about your strategy. Once a notice is served it cannot be unilaterally withdrawn. Should you wish to serve a notice and then decide you wish to stay you will need the agreement of the other party.

• Is the break option personal? If this is the case it stays with the party that it was first attached to. If the lease has been assigned since this point it is unlikely the break option will be valid.

• Make sure you comply with the specific terms of the lease. Compliance is important if the serving of any notice depends on certain covenants being complied with. A prime example would be to have no arrears but it may be other elements such as keeping the property in good repair.

• Make sure you serve the notice on the right people. In the case The Hotgroup Ltd vs The Royal Bank of Scotland (as trustees of Schroder Exempt Property Unit Trust) 2010 the notice was not served on the property manager but merely the landlord. The Courts held that as this was a stipulation in the lease the notice had not been served properly. Make sure the notice is served on the right parties and if the lease is registered your solicitor should be able to establish who the registered parties are from the Land Registry.

The need to ensure compliance with the specific terms of the lease are noted and complied with cannot be underestimated if you wish the break to be valid. The principals apply to both the landlord and tenant, albeit most of the terms, which need complying with, seem to fall on the tenant more than the landlord.

September E Newsletter

This month we consider public sector action and the potential implications for business following rallying calls from the recent TUC Conference;we draw further attention to the CRC debate and highlight the 30th September deadline;we then highlight the shrinking length of the average UK commercial lease and see who this news is good for before introducing a HSE website which shows how better management in this area can benefit the small business.


Our Q and A this month deals with Assigning a commercial lease and touches on some of the legalities and commercial aspects associated with such a disposal method.



Brace Yourself for Disruption

The Unions and Government have opposing views on how to resolve the country’s financial deficit and this may lead to severe disruption in the coming months. As a business, it is important to plan for all eventualities and this situation is no exception. We are thankful that we have been given plenty of warning and this should give you enough time to plan ahead.

With the prospect of widespread strikes looming, many of those services we take for granted are likely to be interrupted leaving many of us severely inconvenienced. Whilst we can only guess what services are likely to be affected, we nevertheless would do well to try and plan how our businesses will cope faced with the prospect of having to do without, for example, a reliable postal service. How will we receive payment of our services, how will we pay our rent or service charge, will our staff be able to reach their place of work, will we have to have more of our staff working from home if the transport network isn’t working? People and businesses will need to carry on and it is now that businesses may wish to dust off their contingency plans and review how they will continue performing the services for their clients.

Managing Agents and Property Owners may also struggle to maintain and service their buildings. Difficulty in sourcing parts, manning the security desks, attending to breakdowns and so on, all impact on the operation of a building. It is clear that people will use their best endeavours to ensure services continue to be provided but it is also worthwhile reviewing your own plans for such circumstances. Communication will be key to ensuring people are aware of what is happening to the building or where businesses struggle to meet their commitments. This is the case for both the property manager and occupier.

Sometime ago The Government, through their website www.direct.gov.uk issued a Business Continuity Management Toolkit which outlines how a business reviews their operation. By applying these principles a plan can be drafted to deliver a strategy that will improve resilience against any potential disruption. We have a link to the Toolkit on our site so please feel free to contact us if you are not a subscriber and would like a copy e mailed.




Service Charges - The Question of Repair or Improvement

One of the most contentious subjects in the property management profession surrounds the thought that the Landlord gradually improves his property, at the expense of the Tenant, by replacing elements of the building with better items, thus improving his property. When it comes to spending the service charge, the actions of the Property Manager will always be questioned; certainly in these austere times.

But how do we know what items of expenditure are right and appropriate? Within a building, the service charge expenditure is governed by the contents of the lease contract between the Landlord and Tenant. However, examples of appropriateness is shaped by case law and a recent case centres on whether it is right to replace single glazed windows with double glazed units. Although it is a case that relates to residential leases the principal will apply to commercial practice.

The case of Craighead v Homes for Islington Ltd & Anor [2010] involved a block of 21 flats where the windows had come to the end of their useful life and required replacement. The Landlord replaced the windows and by installing double glazed units increased the costs by 13%. The tenants challenged saying that the Leases only allowed for the recovery of service charge expenses for the renewal and not improvement of the properties. However, as this was a residential case the dispute was heard by the Lands Tribunal and their Upper Chamber decided it was appropriate for these problem units to be replaced and did not deem it as an improvement.

On many occasions it is appropriate to consider whether the increase in efficiency of an item warrants any additional costs and in many instances it does.




CRC - What's the next stage?

Landlords across the country are trying to ensure, where it is necessary, that they have registered for the Government’s Carbon Reduction Commitment (CRC) Energy Efficiency Scheme. The deadline for registration is the 30th September. But whilst they are heading towards the Registration deadline day, what will happen next? This is just the first stage, the next stage is to reflect on annual energy usage and develop a policy of using power more efficiently.

The scheme measures success in 3 ways; using an absolute matrix, where companies are judged by how much they have reduced their energy consumption, a growth matrix where consideration is given to how companies have grown and an early action matrix where consideration is given where an effort has been made before the start of the scheme. The outcome of this combination leads to the results being published in a league table and rightly some companies will take their league position very seriously.

Property Managers have begun looking at ways of improving energy management. Consideration, up and down the country, will be given to new energy efficient ways of managing property but even then the Property Manager can only really influence how the common parts perform. Examples are already being identified such as the RPS Group plc where they are testing a new retrofitted lighting control system in their London office. It is suggested that this will help to reduce the electricity costs of lighting by up to 70%. Each occupier will be encouraged to be aware of their energy use and through such management tools as the ISO 16001 will be reminded of the need to alter behavioural change.

There is already enough published material available which identifies areas where office occupiers can look to reduce their energy consumption such as upgrading switches in meeting rooms to reduce consumption when not in use, or network more people to less printers to reduce printers standing idol. The Carbon Trust estimate that through simple office management, occupiers could reduce their annual energy consumption by up to 20%. At these levels it is worth thinking about.

This is a huge and topical issue; we have the documents on our system and if you would like copies e mailed then please contact us.




Shorter Leases: for whose benefit is this?

In its Annual Lease Review, the British Property Federation (BPF) and the Investment Property Database (IPD) have recently reported that since 1999 average lease lengths have almost halved from 14.3 to 8.6 years.


The study takes in details of some 91,000 tenancies representing a rental value of £6.3bn and the recent result shows the 8.6 year figure to be the lowest ever recorded. Furthermore the study also saw an increase in the percentage of leases of 5 years or less, rising from 66% to 72%.Now only 10% of leases are set for terms of 10 years or more.

The retail sector saw the largest % fall from 6.5 years to 5.4 on average, followed by offices(5.4 to 4.7 years) and then industrials(4.6 to 4.0 years) but this was also set against a backdrop of increasing incentive packages as Lessors have had to further induce tenants into vacant space.

Not great news for the Landlord/Lessor and generally good news for the tenant community, but as a response to the downturn this is predictable and is evidence that deals are being done and that fewer small businesses are being adversely affected by property constraints in the downturn.

But do tenants really get up and move on when their short lease expires or are they actually using the opportunity to renew with their existing Landlord on the same or better terms? More often than not, if the space still works for them the Tenant stays and renews rather than face the disruption of moving for the sake of modest and debatable savings. Some of the larger Landlords such as MEPC publically state their retention rates (MEPC claim 91%, and are looking to further improve on this) and much of this is down to active management and integration with their Tenants (customers).

So whilst the overall picture is of lease term reductions, many transactions occur between the same leasing parties.

But whilst a Landlord is keen to retain occupancy of his space, the impact of shorter leases is harder felt by an Investor/Developer Landlord who requires longer leases to attract development funding and/or show long term income commitments to valuers. The UK Investment market was the envy of the world for decades by boasting 25 year leases with 5 yearly upward only rent reviews an an Industrynorm, but now, as this Report shows, a Landlord would be fortunate to secure a new lease term even containing a rent review. He may circumvent this issue by negotiating stepped or fixed uplifts and incentive packages to dissuade tenants from exercising break clauses, but the overall message illustrates a potentially more mobile working community with whom Landlords need to engage in order to secure their longer overall retention within a specific building or Estate.




Does Health & Safety benefit your business?

We at TAP are always looking for ways to help organisations and have identified a website operated by the Health & Safety Executive dedicated to explaining how cost effective managing your health & safety is to a small business.


The website is titled ‘Better Business’and the site has been designed to offer general guidance across a number of areas that may have an impact on the working environment of a small business. Each page has a link through to a useful site that provides more information around the subject and,together with their manned Helpline 0845 345 0055,it is a useful number for any business.

Don’t worry if you feel your organisation is too large;the HSE also have a website for larger companies.

If you have any questions regarding Health & Safety and would like to speak to a consultant who specialises in a particular field then please feel free to telephone us on 0800 865 44 50 and we will be happy to refer to one of our Partners.



Question & Answer

Lease Assignment - What is it and how do I go about it?

Assume that your business no longer requires the premises it operates from and is looking to dispose of the lease. You have been unable to surrender the lease and have restrictions on subletting and the only remaining option is to assign (or transfer it) to another company. Selling or transferring a lease is known as ‘Assigning’ and effectively means that you transfer all the current liabilities to another company. It does require your Landlord’s consent and will be conditional on finding a company who is acceptable, in all ways, to the Landlord. However, assigning the lease does not fully remove you from all residual liabilities.

Similar to applying for consent to sub-let a premises,the Landlord will need to be supplied with sufficient information about the new prospective assignee that will support their financial credentials, which will include sight of accounts, various references from accountants, bank and current Landlord. Furthermore they will require comfort in knowing the occupier will not be using the premises for any immoral use or conduct any business that may be seen as a nuisance to other occupiers in the building. It is therefore important to cover these aspects in detail when applying for consent. Depending on when the Lease was granted you may also be required to commit to an Authorised Guarantee Agreement (AGA). This means your business agrees to ‘guarantee’the future obligations of the new tenant.

Once consent has been given and the Licence to Assign, and AGA (if necessary) has been signed by all parties then whilst that tenant occupies the property and meets their financial and leasehold obligations you are effectively released from your leasehold obligations. However, depending on when your lease was granted (Pre or post the Landlord and Tenant (Covenants) Act 1995) then your responsibility may continue and in a circumstance where the new occupier cannot afford or fails to comply with their obligations you will be called upon to ‘step in’and remedy the situation.If Assigning a Lease which was granted before 1995 then your responsibility will continue until the Lease has expired, although should the tenant fail to meet their reinstatement obligations then you may have to meet that obligation. However, if the original Lease was granted after 1995 then there is a possibility that should the company, (who you assigned the Lease to) assign it again, then your future responsibilities may fall away as the Act limits on-going liability. Following a recent case,this release also applies to Sureties who now cannot be obliged to guarantee the performance of the original lease.

Assignment is therefore the effective sale of your lease to another acceptable party and the price(‘consideration’) of that sale is often referred to as a Premium…or reverse premium…dependant upon the level of current rent passing compared to the prevailing market rent at time of assignment;therefore you,as an assignor may actually have to pay to sell your lease if your ‘passing ‘ rent is above prevailing market levels. For further details, call us on 0800 865 44 50.

AUGUST E NEWSLETTER

Editorial

In this edition we look at 2 issues in the Sustainability arena: the British Property Federation’s findings with regard to CRC costs allocation and how your business might benefit from addressing procurement and purchasing in a ‘greener ‘way.  We also cover 2 issues of Insurance;one affecting cost via taxation,the other being a worrying report on the actual understanding what cover businesses actually need.On a brighter note we report on a reduction in Red Tape and conclude with a Q and A on Landlord approvals in the event of you wishing to sublet.

Enjoy the Summer!

 

No one is sure how to share the cost of Carbon Allowances...
 

A working party at the British Property Federation has published the results of their consultation on the introduction of the Carbon Reduction Energy Efficiency Scheme. In summary the conclusion supports the view that the ability to recover the costs associated with this scheme very much depends on the wording of the lease; with the acceptance that if both real estate investors and occupiers work together then everyone can benefit from the improved energy efficiency of a property. In this respect Landlord’s are looking to introduce Memorandums of Understanding (MOUs) to set out how to achieve a successful partnership.

 

The Working Party was made up of a number of people from a cross section of the property profession and reviewed a number of questions surrounding this topical subject. Many of the questions considered how the costs and potential benefits from the recycled payments, the scheme may generate, would/could be distributed; was it right for tenants to receive some of the benefits arising from the recycled payments if they didn’t contribute? Should they contribute in the first instance? What is the difference between the costs associated with administering the scheme with those for buying the allowances? Should the costs for the common parts be separated from those for the tenanted areas where the Landlord supplies the energy but the Tenant decides how it should be used?

There is no real consensus to these questions but overall it is evident the profession needs to work together to reduce the amount of energy we all use. Over the next 3 years those property owners who are captured by this scheme will have to buy allowances at a value of £12 per tonne of carbon emitted. After this initial 3 years term the cost of carbon will be subject to market forces and people are already suggesting it will increase thus forcing energy prices to rise. During this ‘settling in’ period Companies may wish to turn their attention to looking at ways of conserving power and according to the Carbon Trust companies can save up to 20% of their annual usage by improving their approach to using power.

We at TAP believe the future will see every organisation having an energy plan (drafted in compliance with BS 16001), more energy conscious clauses incorporated into commercial leases, energy managers responsible for overseeing consumption across a portfolio and a better working partnership between the Landlord and Tenant where both parties appreciate the benefits of investing in new plant where a reasonable pay back on the money can be seen. These suggestions are all reasonable but before we get there we need to repair the fundamental fault in a Landlord and Tenant relationship that the occupier doesn’t always trust a Landlord’s motive for doing something.

Would your business benefit from Sustainable purchasing?

TAP has been in the fortunate position of meeting many people since we started and often the question of sustainability is raised. Many organisations tend to be ambivalent about the subject seeing the ability to trade in a sustainable way to be more expensive and until changes are made companies will focus on other aspects of their business where it is cheaper to achieve results.

But what are the benefits in using sustainable methods in your daily business life? NetRegs has a useful website which explains the benefits but here is a brief overview.

• SAVE YOU MONEY: Landfill tax is increasing, so why pay more than you have to.

• UTILITY EFFICIENT: With more efficient products on the market you can look to drive down operational costs

• DIFFERENTIATION: Make your offering different to you competitors. Many larger businesses are looking for this attitude from their suppliers.

• INDUSTRY REPUTATION: among staff, customers and the public

• MITIGATE RISK: New products have been manufactured in line with the latest environmental standards.

• TAX EFFICIENT: Especially with energy efficient equipment, there is a possibility of benefitting from

Enhanced Capital Allowance (ECA) scheme or loans for energy saving measures from the Carbon Trust

Larger companies are looking at ways of working with organisations who can demonstrate support for their

Corporate Social Responsibilities and so pressure is being brought to bear on smaller companies to work in a more responsible way. Companies who change their policies to incorporate sustainable policies in both procurement and operation will stand them in good stead for winning business from many larger organisations. If you buy goods and services in the public sector you should see the Office of Government Commerce (OGC) guidance on sustainable public procurement, Centre of Expertise in Sustainable Procurement.

Be prepared for higher insurance premiums

As part of the recent budget many people may have missed the fact the Chancellor has increased the Insurance Premium Tax (IPT) by 20% from 5% to 6%, and the higher rate from 17.5% to 20% with effect from 4th January 2011. Not much you may feel but nevertheless an indication that occupational costs continue to rise.

As with most charges, in these times, where there is a need to have an insurance policy it is rare for the annual premium to be lower year on year but if you are an occupier with a good claims history it may be sensible to remind your Landlord of how good you are at managing your property matters. Good housekeeping by making sure you’re up to date with your various responsibilities such as Fire Risk Assessments, Portable Appliance Testing or general risk assessments will help to demonstrate a systematic approach to managing risk. This will help in seeking the reward of lower premiums. The counter argument is that with many Landlords they have a block policy that has many factors which influence the premium but if all tenants could work together in a collective manner then insurance brokers and underwriters would have to listen.

TAP can help you with managing your risk and reviewing how you maintain your records. Just call us on 0800 865 44 50.

Cutting through the red tape!!

You may not believe it but you have probably received the benefit of having to comply with less red tape! According to the latest Government Report, Simplification Plans 2005 – 2010 businesses have received the benefit of less red tape which has an estimated saving of £3.50bn. In these austere times the Government has introduced a number of simplification measures which may take the form of fewer changes to legislation, publication of guidance or the creation of web-based tools and all these to assist the business community.

It seems all these measures have been validated through an independent validation panel which comprised individuals from a number of organisations such as the TUC, CBI, Federation of Small Businesses and Confederation of British Industry. So have you benefitted from the introduction of some of the measures?

HSE Example risk assessments – Easy to use examples of risk assessments for 34 lower risk activities. As at May 2010 estimated savings were £235m.

Ladbrokes are an example of this where Bill Bennett, Health & Safety Manager stated “We complete all our assessments in-house but because we have so many (2,400) betting shops and the assessments themselves are so diverse – there are 26 generic risks to a typical small betting office – the paperwork volume was very high”. By having a simplified approach they can now produce the documents much quicker and simpler, saving time and money.

Abolishing the requirement to display Employers’ Liability certificates at all business premises which estimates savings of £58m.

By way of an example Adrian Rendell, Risk Consultant for BT mentioned that “The requirement to display an Employers’ Liability certificate at each of our premises was an enormous burden on BT, and probably many other large Corporates, because of the number of premises. Most employees would probably look for it on the intranet where it is freely available.” The change allowed businesses with suitable IT systems to display certificates electronically so long as staff had reasonable access to it in that format.

Introduction of Netregs an on line Environmental Agency service which it is estimated saves businesses approximately £32m per annum.  An example is John Patch, Director, Roger Bullivant who commented

“We cannot be environmentally responsible without understanding the wider issues governing sustainable business. NetRegs.gov.uk is a great tool for helping businesses reach this goal and I would certainly recommend it.”

You may not appreciate some of the changes that have happened over the last 5 years but it is certain from the examples listed that changes are afoot to help small medium enterprises (SME’s) and the micro businesses. Many people do not realise that SME’s make up 99% of all businesses in the UK and micro companies, who employ less than 10 people, make up 96% of businesses in the UK employing 7 million people. Both the costs and the time required to comply with regulations are proportionately greater for smaller businesses and can take resource away from their core business. That is why the Government consider it vital that these burdens are minimised to allow these enterprises to thrive and, in so doing, strengthen the UK economy.

They therefore have a policy to ‘Think Small First’ which is an approach they take when drafting primary and, now secondary, legislation.

Do you understand your business insurance policies?

Apparently 70% of Small businesses believe they understand their insurance policies but research by Premierline Direct feel this isn’t the reality. Are you the same?

For example 42% of small companies weren’t sure if temporary employees or work experience personnel were covered by the firm’s Employer Liability Insurance Policy, despite Employers Liability Insurance being compulsory for any company that hires personnel, regardless of the terms they are employed on. Furthermore, more than 30% were unclear if health & safety legislation applied to every company even if they employed less than 5 people. Also 53% of companies did not realise how often they should review their risk assessments in order to comply with their business insurance policies.

Other interesting points which came out of this research were that companies didn’t realise they could insure for legal costs associated with a dispute nor that their policy may cover seasonal increases in value of their stock.

What is more important is that many businesses did not inform their insurers of a change in circumstances, particularly where the change on circumstances may affect their insurance cover. For example 73% of businesses didn’t inform of an increase in stock levels, 62% to changes in the security arrangements (Managing Agents may have an input into this element of service), and 69% about employing more

staff.

Chris Little, managing director of Premierline Direct commented, "It’s vital that business owners are honest with their insurance provider as their answers help to establish the level of risk the company is at and ensure they receive adequate protection."

"To ensure that a business is fully covered by its policy, it is essential that the insurance provider is advised of any amendments to the business. This may include expansion through selling new products, moving premises, changes to the company structure altering its legal entity and an increase in turnover or staff," stressed Little.

"In addition, if SMEs fully understand a business insurance policy, then they can have the confidence to go direct to a provider, which can lead to cost savings," he concluded.

Sub-letting – Why won’t my Landlord give me consent to sublet my premises now I’ve found a company?

One downside of a commercial business lease can be its lack of flexibility; especially when you no longer require the space.  How do you mitigate the cost of having vacant space? One such way would be to sub let part or the whole of a property but this will depend on the wording contained in your lease.  As a Tenant looking to sub let space do you understand what a Landlord is looking for when considering an application?

In all situations a Tenant looking to sub let either the whole or part of their space will have to refer to the terms of the lease. The lease identifies whether such an arrangement can be made and if so what conditions are attached to any such application. There are a few principles any company applying for consent should be aware of before they apply for consent.

1. Lease or a Licence? Be careful, many Landlords will not grant consent for a Licence to Occupy.

2. Length of Lease remaining vs length of lease being granted.  In all cases a sub lease will have to be shorter than the remaining time left on the current lease (usually by a few days).

3. Passing rent or Market rent? The ‘headlease’ will state whether the rent which can be agreed in the sub lease should be the passing rent (ie the rent being paid in the current lease) or the Market rent,ie that which can be found in the prevailing market place. Why is this important? Well it’s because the Landlord will want to ensure that the value of the property remains high and he will be looking to secure the highest possible rent.Market rents vary and if they are below the passing rent then a letting at that level will become market evidence which can reflected in a lower valuation of his asset.

4. The terms of the sub lease match the terms of the superior lease. A subtle point but one which may ‘muddy the waters’ in any negotiation. In short, most sub leases will need to match the principle terms of the superior interest, such as the timing of a rent review or the recoverability of the service charge.

These are the principle issues that will need to be considered along with an understanding of the financial strength of the proposed sub-tenant. Timing on any application is important and where a Landlord does not agree to the sub letting then he should inform the applicant as soon as possible, stating clearly the reasons why he does not agree. In any event an initial decision should not take longer than 14 working days although the full documentation may take longer.

Once this has been agreed the Landlord’s solicitors will issue a Licence to Sub let. This document is evidence of the approval.

There may be other points to consider such as insuring new fit-out works or changes to the service charge apportionments if changes to the premises increase the floor space which we haven’t covered and if these are relevant to you then please call TAP on 0800 865 44 50 and we can guide you through any concerns you may have.