The budget was delivered last month but we look at what it means for property. Costs, collaboration and energy are also covered in this edition. People talk about working with the property manager and we open with a view on how working with them can result in lower budgets. We review the possibility that EPC’s may contain stronger teeth in an attempt to ensure recommendations are undertaken and also we examine the idea that DEC’s may replace EPC’s. There have also been a couple of worrying reports about how companies are performing in these difficult times and it’s not all good news. Do your liabilities continue once your lease has been assigned? We look at this question which isn’t straightforward.
Collaboration from occupiers will lighten operational costs
The latest RPI figures indicate inflation is falling but commodity prices remain strong and this situation continues to apply pressure on the property manager to maintain service charges at a reasonable level. Property Solutions, a Commercial Service Charge Consultancy is due to publish their most up to date report on service charges. This report, researched by Kingston University, suggests that tenants require greater transparency and accounting procedures from their property managers who manage approximately £4.06bn of annual expenditure on behalf of the occupiers. We ask, are costs the sole responsibility of the property manager or does some of the responsibility lie with the occupier?
Occupiers accept that service charges are wholly controlled by the property manager but what influences their decisions on how they budget monies and how do they prioritise projects? It’s relatively simple; external factors such as the retail price index, new legislation and commodity prices have a huge effect on annual expenditure and many have seen these impact costs over recent years. Of late, we have seen financial pressure on service charges from such issues as the heightened awareness of asbestos management and more recently the civil unrest in the Middle East, impacting on energy prices; this latter element affects every element of the service charge budget as it is such an integral part of transport.
Older buildings suffer from disrepair and obsolescence and so in these situations repair or replacement costs become even greater.
Many property managers are focusing on energy monitoring where costs can be saved through collaboration with the occupiers. Simply changing your working behaviour could reduce energy consumption and save up to 15% in costs. By turning off lights and office equipment, when not being used, is the simplest way to reduce wastage and we know of one property manager who is using their security guards to take photographs of the building at night to identify occupiers who leave their lights on.
So as an occupier how can you collaborate with the property manager? The property manager needs to understand how your organisation works and what is important to your business, so work with them and re-state these. Form a working party with other occupiers to see how you can introduce working practices that may have a positive impact on costs, for example look at when the building is occupied and judge if the heating/air conditioning times are set properly. With landfill costs increasing, try and look at increasing the recycling rates, and reduce the amount of tonnes of waste that is sent to landfill. Think about water, use optimisers or ‘hippo’s’ to reduce the amount used.
Overall working with your property manager will enable a stronger working relationship to be established and this will lead to more benefits being created. Shy away from being obstructive as this will not assist the relationship and is more likely to damage and future goodwill.
If you’re unsure about any of this do call TAP and discuss any points you may have.
Government support for Energy Performance Certificates (EPC’s) gains momentum
Alongside another Article in this edition about Display Energy Certificates, we observe that the EU Directive (EPBD) is being recast and must be implemented into National Law by July 2012 and take effect from January 2013. Following a Labour Government consultation which finished over a year ago it was interesting to see how a new Coalition Government would react to the 140 respondents to the initiative entitled, ‘Making better use of Energy Performance Certificates and data’.
However it seems that both Brussels and Westminster are keen to give greater ‘teeth’ to EPCs and encourage higher rates of compliance.
The consultation was not all focused on EPC’s however, notably because the Directive also covers wider regulation for energy reduction in domestic and commercial properties, and accordingly the Coalition has identified, inter alia, 5 areas for further consideration:
Wider freedom of information .i.e. to make all EPC data freely available, including the energy rating and recommendations for individual properties.
Inclusion of EPC data in all advertisements about a particular property
Extending the EPC net to include homes in multiple occupation and certain holiday lets
Extending the requirement for DECs into the private commercial property sector (see separate article)
The mandatory requirement to have air-conditioning reports lodged on the EPC register. This falls short of requiring the need to have regular boiler inspections too, which should be encouraged but remain voluntary. That being said, one has to assume that such inspections are very likely to become mandatory too.
Much of the above will be enforceable under the Energy Bill, which is introducing The Green Deal (.i.e. Energy efficiency measures funded by savings in energy bills) and the support that the Coalition is making does indicate that amongst other measures, it will be giving EPCs greater clout, enabling far more transparency into those properties which will need to be improved, perhaps even before they are capable of becoming lettable or re-lettable.
Businesses need assistance more than ever......
Firms showing signs of financial distress have increased by 15% this quarter according to the most recent Red Flag Alert Report from Begbies Traynor, Corporate Recovery Experts. The Report identifies that 186,554 firms are suffering from "significant" or "critical" financial distress in the first quarter of 2011, in contrast to 161,601 at the same point last year.
The Report monitors those elements of a company that may result in financial woes and highlight the leisure sector as an area that is experiencing most risk. The cause of such problems seems to be down to the public reducing their discretionary spending in these areas. The number of firms which have seen an increase in financial distress in the leisure and cultural sector has risen by 60% and the service sector has seen a 61% increase.
Factors such as significant numbers of redundancies in the public sector linked with high fixed costs is contributing heavily to this situation and it is now time for landlords and property managers to be aware of this issue and where possible provide greater support than they are already doing.
As expected, Display Energy Certificates (DEC’s) are proposed to become mandatory, PERHAPS ultimately replacing EPC’s
To date DECs have been mandatory in public buildings of over 1000 sqm since 2008, but as they are formulated to record actual energy usage, as opposed to the more generic notional parameters of an EPC, it has been viewed as an inevitability that the DEC’s relevance would supersede its predecessor, and voices are now getting louder for their widespread implementation.
Such a rollout will not happen swiftly however and commentators anticipate a ‘soft start’ in 2012 such that sufficient time is given to measure and collect data and the production of Certificates in perhaps 2012/3; moreover, its proposed that results maybe treated as confidential initially so that benchmarks can be established and thereafter, akin to the CRC league table, the results will become widely available for scrutiny of both Landlord’s and Tenant’s energy usage/reduction.
Compliance costing is another factor for Occupiers and Landlords alike but the UKGBC can see a developing scenario of very low cost compliance once measurements are directly linked to Utility metering data thereby allowing mass participation at low cost. This however is unlikely to be widespread until at least 2015. In the meantime, a growing need for more qualified assessors will emerge to implement policy; and such policy is anticipated to come via the Energy Bill which is currently passing through Parliament.
So, barriers to entry certainly exist, but the DEC ball appears now to be rolling and the UK’s drive toward a low carbon economy will appear in the ‘stick’ that the authorities will introduce for non compliance…as yet we have yet to hear about enforcement and sanctions.
The Budget 2011; what’s in it for the TAP audience?
Billed as a Budget for Growth, this year’s announcements contained the usual mixed bag of news for property occupiers, owners and investors.
Short of listing every measure in detail, we have identified some that will touch business and property:
A 5 year extension of the Business Premises Renovation Allowance, whereby 100% tax relief is available on the Capital Expenditure incurred on bringing buildings back into business use. This was originally a temporary measure which was due to expire in 2012, and is now extended to April 2017.
A 1 year extension to the Small Business Rates Relief from October 2011 whereby eligible ratepayers with an RV of £6,000 or less receive 100% relief, and those with RVs of between £6,001 and £12,000 receive relief on a sliding scale from 100% to 0%.
The creation of 21 new Enterprise Zones nationwide which will benefit from Rate Free occupation for a fixed period of time.
Four annual 1% reductions in the main rate of Corporation Tax, taking it down to 23% by 2014
Smaller company (profits of less than £300,000) Corporation Tax reduction to 20% from 2011.
A moratorium on new domestic regulation for Start-ups and SMEs with less than 10 employees for the next 3 years.
Research and Development tax credits for SMEs will rise to 200% this month and up to 225% in April 2012.
Oh, and let’s not forget the £100m set aside for pothole repairs!
These measures were all well received by the industry and small businesses; however the glaring concern for many was the lack of any U-turn on the Government’s stance on Empty Property Rates. The decision to slash the threshold for empty rate exemption on vacant properties with an RV of less than £18,000 to only £2,600 remains an enormous burden for many businesses to bear and pre Budget expectation that this measure may be re-thought was short lived.
As with all Budgets there are winners and losers but the general scope of tax reduction and simplification (both in taxation and bureaucracy) should help stimulate some much needed confidence back into the business community, with obvious advantages for the ownership and occupation of property.
Question & Answer –
Does my liability end when I’ve assigned my lease?
We recently received an enquiry about this very subject. The question came after the tenant had trawled the internet for the answer but was confused by what they had learnt.
The question is, once I’ve assigned a lease do my liabilities cease or is there a chance I may become liable again should the new occupier default?
A lease assignment is the legal process of transferring a lease from one business or person to another. It is a transaction that is driven by the tenant and is subject to the consent of the landlord. Turning to the question, and assuming the lease agreement doesn’t say otherwise, the simple answer to this question is yes the original tenant will remain liable should the new tenant fail to meet their contractual obligations. However, if we look at this in more detail we can introduce the Landlord and Tenant (Covenants) Act 1995 as this Act loosened the grip of the original Landlord and Tenant Act 1954 (Pt II).
For any lease granted before the 31st December 1995 a (an Old Lease) the liability of the original lessee will continue until the lease expires regardless of how many times it is assigned. However, any lease granted on or after the 1st January 1996 will be subject to new rules which were designed to restrict any on-going liability by introducing an Authorised Guarantee Agreement (AGA). This AGA (between the landlord and the current lessee) commits the out-going lessee to ‘guarantee’ the performance of the leasehold covenants for the duration the assignee holds an interest in the lease. Once the assignee has assigned the lease the original tenant’s liability stops. Although it seems complex it proves to be a better situation as an original tenant could see his liability being curtailed whereas under the old rules his liability remained in place for the term of the lease.
If you are faced with this situation and would like to discuss your specific circumstances please call us on 0800 865 44 50.
