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?
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?
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.
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