As the world focuses its eyes on the horrific events in Japan, the primary focus is understandably on the human toll. Needless to say, the horrendous destruction of property compounds the abject misery and shock for survivors. Whilst our industry can make every attempt to safeguard life and property, last week’s events give us a sobering reminder that almost all that we do is at the mercy of nature.
Our first article talks of a related, but, in context, relatively minor story about water damage to business and the approaches taken by the AIB and Government. We then look at 2 issues where the property overhead is being highlighted; increased litigation levels between Landlords and Tenants as the downturn brings to the fore the part that property plays as an overhead, and the lowering of the business rates relief threshold on empty property.
We then look again at the 2 most high profile Best Practice guides for the property industry and the adherence or not, to them; another VAT related story on Waste removal and then we conclude with a valuable reminder about the dangers and importance of asbestos and the need for strict compliance with the rules surrounding its management.
The price of keeping your head above water is going up.
The summer flood of 2007 resulted in claims in excess of £3 billion, the Carlisle floods of 2005 had claims of £272 million and the Cumbrian floods of 2009 resulted in claims of £174 million. These claims are met whilst flood insurance remains available and if the Government removes their commitment it is likely premiums will rise and in some instances cover will no longer be offered. How will this affect the property industry?
The insurers are not just concerned by rivers breaking their banks or coastal erosion but also groundwater flooding, which is where the drainage system cannot cope with heavy rainfall or melting snow.
As a consequence both Landlords and Tenants will be affected by this potential drop in cover and/or increased premiums. For a landlord, not having cover may infringe their banking covenants or result in them needing to enhance their flood defences which in turn may result in consultation about any consequential loss. This will have an impact on the property’s valuation. For tenants it will result in business interruption as there are still properties that locate their generators and electrical switch rooms in the basement and, in many cases, ill-prepared businesses may not survive a major interruption.
What can be done to help Tenants prepare for such a hazard? The Environment Agency is beginning to work with utility providers, emergency services, insurers, transport and the retail sectors to develop flood warning products and services. Organisations will need to obtain a licence to use the data but it is hoped that using this information will enable responsive action to be taken either to assist in preventing damage from a flood in a known area or reacting to an imminent flood warning. Additionally, we suggest that you think about the critical components that may cause interruption to your business. We have previously mentioned that this could include emergency power generation, telecom racking and important filing and data which is stored below ground all of which would be critical to your business. Also look at staffing arrangements; often business interruption results from people not having access to their place of work. Here having a ‘cloud’ based IT network may assist in getting through such an issue.
We have looked for useful websites that may help you think about business continuity. London has a useful website that can assist businesses in thinking about preparing their business for such an event. We have uploaded a link on our site to both the London and Business Link website but if you’re not one of our subscribers click here for the link to London Prepared and here for Business Link.
Landlord and Tenant High Court disputes rise by 43% in one year
A recently published report by the legal information provider, Sweet and Maxwell (S&W) has shown a significant rise in the number of disputes reaching the High Court. The statistics show that in the recessionary years of 2008 and 2009 (the most recent figures) the numbers rose from 28 to 40 and this has been put down to a rise in the number of companies trying to reduce property overheads, especially in the methodology used in attempting to dispose of surplus property.
Whilst S&W point out that many disputes are resolved by negotiation and arbitration, the increasing High Court numbers illustrate the importance that is now being placed by both parties on property matters. On a wider scale, the High Court (Chancery Division) numbers show a dramatic rise from 2005,where only 2 cases are listed, then rising to 3 in 2006 and still only 5 in 2007.The huge % rises in the 2008 and 2009 numbers is clearly linked to the economic downturn.
Examples cited include sub-lettings that are attempted by Tenants at below the passing rent, which is in contravention of their Lease’s Alienation clause, and actions brought by Tenants where Service Charge contributions are in dispute.
The other key areas that have triggered Court actions lie in Break Clauses where Landlords will be particularly keen to see that Tenants have fully complied with all contractual terms and conditions; in Lease Assignments where a Landlord will be looking closely at the financial strength of the proposed Assignee; and in the area of Dilapidations (often contentious anyway) where Tenants may feel that Landlords are being excessive in their Claims and where Landlords believe that Tenants should adhere accurately to their reinstatement obligations.
Whilst more up to date figures are still not available, TAP can only assume that figures for 2010 will continue to evidence that upward trend as economic conditions dictate and prioritise a business’ overhead exposure.
Lowering the business rates relief threshold may impact quoting rents
April 1st sees a change to the rating relief available as the Government reduces the Rateable Value threshold level from £18,000 down to £2,600. From this date forward vacant properties that have benefitted from the higher threshold will now have to pay full business rates.
It is expected this will have the greatest impact on industrial space where rents are generally lower but offices and retail may still be impacted. It is unlikely to have an impact on Central London property where the business rateable values are more likely to be above this level but it will impact properties in poorer parts of the country.
Older buildings that have not been modernised and provide smaller units could be caught by this change. Start-up space or incubator units may well fall into this category and Landlords or occupiers who have surplus space may feel the financial pinch. If they are marketing vacant space whose Rateable Value is less than £18,000 they may now be faced with the dilemma of perhaps reducing their rents to encourage a letting. In the past, Landlords have sought to remove similar financial burdens by looking at demolishing the property. This may seem a drastic measure but in some instances this is by far the cheaper option. The Federation of Small Businesses believes this change will badly affect small landlords and leaseholders. Andrew Carter argues that April will push firms to the edge. He says “Business rates are in the top three of the largest overheads that a small business has to deal with. Add to that the higher chance that, because of the economic situation, businesses will have properties that are left empty. So stopping rates relief serves to penalise those businesses that are suffering most.”
Have you cracked The Codes?
In our earlier e Newsletters, we have made mention of both The Code for Leasing Business Premises in England and Wales 2007 and the 2006 RICS Code of Practice; Service Charges in Commercial Property, both of which came into force during 2007.
We still believe that, whilst both are still voluntary, they set helpful parameters within which leasehold participants should operate, so long as enough participants actually know of their existence.
Who then should be promoting them?
Whilst Tap’s full name might hint at some form of allegiance, we do in fact operate impartially and seek to offer Guidance to Landlords and Tenants alike, such that property-specific information is made available and, in the absence of any other body proactively drawing attention to both Codes, we are happy to keep referring to them.
The RICS has been mooted as the best professional body to promote and maintain/amend the codes and to date a couple of University surveys (Reading and Loughborough) have reported that widespread take up and attention has not been achieved, mainly as the industry has relied on surveyors, landlords and lawyers to employ the Code clauses only where it suits. Their voluntary nature plays a part in this, although the Service Charge Code appears to carry greater weight as it has been issued as an RICS guidance note and as of December last year the RICS submitted a new version of it for consultation which closed on January 21st,with results expected at the beginning of May.
The purpose of each Code is to act as a guide to best practice and depending upon whom a surveyor or lawyer is acting (Landlord or Tenant) there is bound to be varying opinion as to what this actually means in practice and hence there is always likely to be evolution and adaptation being advocated by the advisory side of the profession. However current feedback suggests that most surveyors find them helpful, but the reality is that market forces will play a large part in their adoption, namely that with a trend towards shorter leases and capped service charges there has been less of a need to fall back on best practice guides.
Certain property markets(notably London Offices) are showing signs of recovery as Tenant demand picks up which may lead to lengthening leases and a re-emergence of Rent Reviews, both of which could see a move towards closer equilibrium between Landlord and Tenant and hence a more likely application of one or both Codes.
The market will determine take up, and TAP will keep on promoting them.
Local Authorities no longer charge VAT on waste collection
After a recent policy review, HMRC now consider the provision of trade waste collection services to be non-business. However, as the sector includes collections from public organisations and also commercial companies, removing the VAT element for those in the public sector does raise questions about unfair competition. In spite of this observation HMRC does not feel this is the case.
The letter from HMRC to the local authorities summarises the position as: -
We have been fortunate enough to be provided with comprehensive data from DEFRA about the whole commercial waste collection market. Both Local Authorities and the private sector collect commercial waste, and so there is at least a theoretical possibility that relieving Local Authority commercial waste collection services from VAT could result in the ‘significant distortions’ of competition referred to in the second part of Article 13(1) of the Principal VAT Directive. However, having considered DEFRA’s data and CJEU precedent, we have concluded that, in this instance and under these particular circumstances, there is no evidence that such significant distortions would arise.
According to articles we have seen a few experts believe this may lead to the possibility of reclaiming VAT going back several years. Whilst TAP is not in a position to offer advice on this,it is fair to say that it may be a question for your accountant.
Question & Answer
As an employer what actions do I have to take if the building has asbestos?
Recent judgements have seen large compensation claims awarded to people suffering from asbestosis. Asbestos is a natural fibre which is mined predominantly in South Africa and can take the form of blue, brown and white material. Because of it’s ability to withstand heat, electricity and sound it has been useful in the construction of properties throughout world.
As it is no longer used in the construction of buildings and associated mechanical systems, properties built after 2000 are generally clear of any potential hazards. However, there is still a need to manage the material which remains present in those buildings constructed before 2000, as it can still be found in pipe lagging, floor tiles, roofing, soffits, pipe gaskets and so on. Consequently there’s still a need to manage the material and monitor its condition as any damage may cause loose fibres that can be detrimental to health. Components that contain asbestos are often referred to as ACM’s (Asbestos Containing Material). So what does an occupier have to do?
Under the Health & safety at Work Act 1974 and employer is required to ensure the working environment is safe to work in and the duty to manage asbestos is contained in Regulation 4 of the Control of Asbestos Regulations 2006. Unless a building is new or has been fully refurbished there is a strong possibility that asbestos may have been used in the construction of the property. If this is the case and you are part of a multi occupied building then request from the landlord or his agent a copy of the asbestos survey and management plan. This will indicate if the there is asbestos in the building and what regime the owner or manager has in place to monitor and manage the material. It is unlikely that this survey will have covered a Tenant’s demise and so there will be a need to undertake your own.
The survey may need to identify and test material and if necessary an element of intrusion and investigation will be required in be sure of its identification. By knowing where it is located enables an occupier to fulfil its obligation of monitoring and managing its condition by conducting reviews through regular inspections.
If you aren’t aware of your own situation please don’t delay in finding out.
Should you require any further information on this subject then please call us on 0800 865 44 50.
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