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Commercial Lease Renegotiation
As the fallout from the pandemic takes its toll on the property sector, £1.5bn of March rent payment remains unpaid in UK commercial property. Savills analysis shows that retail park rent collections were at 53% and 52% in June and March respectively, while shopping centres went from 45% in March to 39% in June. This puts significant pressure on landlords’ own income streams while forcing the issue of whether current rental levels and leasing formats are sustainable.
As a consequence, 86% of landlords expect shopping centre rents to fall, with rents anticipated to fall by 22% on high street, 30% in shopping centres, 13% in retail parks and 34% on leisure schemes, by the end of 2021, following the Covid-19 pandemic. RICS forecasts rents for retail properties to fall 10–14% this year alone.
On average, retailers are typically seeking an average of 30% reduction in rent across their estates, or are seeking alternative lease models, such as turnover rents. At the end of 2019, turnover deals accounted for <10% of UK leases but have come under the spotlight recently due to Covid-19. This has forced a rapid reflection by the whole retail industry on the future role that affordability should play in what tenants commit to paying their landlords.
Turnover rents have been discussed in the industry for years, with 90% of retailers already having existing turnover leases within their portfolios. With challenges in the retail sector over the last decade, more retailers have been keen to seek more affordable rent agreements. Landlords have traditionally been reluctant to commit to turnover leases in the long term as they rely on the security of income and valuations that are still based on upward only rent reviews.
However, landlords are proving to be much more open to restructuring their leases and a significant proportion of the discussions Savills is involved in include negotiations around turnover-based rents. However, recent negotiations are not necessarily intended by landlords to be a permanent fixture, but more of a way of navigating the current challenges in the sector; 74% of landlords anticipate current arrangements to only be in place for up to 24 months.
Turnover rents are by no means a straightforward alternative to traditional upward only market-based rent reviews, with few deals being identical and the terms agreed on retailer, product category or location-specific deals. Analysis of Savills rent negotiations shows that turnover rents requested by retailers range from 1–15%, with an average of 7%. However, the detail is far more complex.
Almost all deals are in some way unique, either from the turnover percentage, baseline with ratchet top-up, or inclusion of service charges. Turnover rents may be separate from service charges or be higher and include provision. The advantage of the latter is that the retailer has a clear view on affordability. In many parts of Europe, rents are based on Effort Ratios, where total property costs as a proportion of turnover are designed to create sustainable rental affordability.
Renegotiate & Restructure Your Business Rent
Restructure your lease before renegotiating your lease. We recommend you thoroughly evaluate your business in terms of how it is producing and what can be done in the future to maximize business.
In other words, how much money is the business making and spending and what are your future goals and projections for expenses and cash flow?
Consider the following, prior to negotiating a new lease:
Do a market analysis, or hire a professional to do it, to determine if you are overpaying.
Remember that occupancy costs—the price to run your business based on your square footage—should be 10% or below.
Reread the lease, especially locked-in provisions that don’t easily allow for changes to the agreement.
Consider parking ratios and give back spaces in exchange for better terms or other needed options.
Lease re-gearing is one of the most positive ways to help clients achieve their goals. Lease re-gears depend on the willingness of both tenant and landlord to amend their existing lease obligations.
A lease can be varied at any time. However, rent reviews and break dates offer further flexibility for tenants to explore the possibilities of restructuring their lease. Landlords are often willing to negotiate a lease re-gear, as it delivers an increase in the value of their property and reduces the risk of a rent void.
The flexibility of lease re-gearing allows us to consider the requirements of the landlord as well as the tenant in order to produce a ‘win-win’ situation
We have a specialist division which specifically advises licensed premises on their business rates. Unlike the government, we understand the day-to-day financial pressures faced throughout the licensed trade. With costs rising year-on-year, coupled with lower margins, it’s becoming increasingly difficult to keep in profit.
Licensed premises with business rates affecting associated costs, such as late-night levy and Sky Television, and being based in most cases on historic trading figures back in the boom time of 2008, they will certainly be one of your highest overheads. Don’t despair – these can be successfully appealed.
Even if you have appealed before or trade has increased, you may still be entitled to a reduction in your business rates, resulting in a cash rebate and a reduced bill moving forward. Reduce your costs and put your hard-earned money back into YOUR cash flow.
Vacant Property Rates
Vacant properties are liable for Business Rates at the same basic level as occupied properties, after an initial rate free period of 3 months. In the case of industrial properties, the rate free period lasts for 6 months.
This places a heavy financial burden on business ratepayers who are paying full rates on a vacant or unoccupied property. In these circumstances, it is essential that business ratepayers take action to reduce their empty property rates liability through a variety of available strategies.
Hampton Lovett Consultant Surveyors can evaluate the rates liability on your empty premises and ensure you don’t overpay. Our team can supply you with honest, professional advice with the sole focus of reducing your liability.
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Reasons You May Be Entitled
to A Lease/Rent Reduction
As a tenant, you should communicate with your landlord and try to negotiate to alleviate any situation regarding untenable costs. There are things you can ask your landlord to consider.
Landlords have the right to demand the rent due, so try and agree on a suspension or waiver of rent for a period of time, if necessary. Alternatively, you could try asking for a rent reduction e.g. 50% reduction for a fixed period. If this cannot be agreed upon, then try asking for a moratorium for 3-6 months or for the rent to be deferred until a later period. Remember, your lease is likely to provide for interest to be paid on rent not paid in time, usually at the rate of 4% above the bank base rate. Consider negotiating over this. Consider asking for the rent to be converted either temporarily or permanently to a turnover-only rent so that the landlord receives a percentage of the tenant’s turnover or net profits. That way, the benefits from the trade can be shared.
If you pay rent quarterly in advance, ask to pay quarterly in arrears instead or to pay monthly if this will assist with your cash flow. If you can reach an agreement in principle, make sure this is confirmed in writing and your landlord agrees not to take legal action while you are adhering to the terms of the agreement. Remember that in the absence of an agreement, a landlord could take proceedings to recover arrears of rent in the courts against the tenant and any guarantor under the lease. Alternatively, they could take commercial rent arrears recovery action by taking control of the tenant’s goods. The landlord could also serve a statutory demand and threaten insolvency proceedings if payment is not made within 21 days.
Consider negotiating a surrender of your lease which would enable you to be released from future obligations. The landlord may seek a premium to compensate them for future loss of rental.
How strong is your negotiating position as a tenant?
Given the large number of vacant properties and the number of businesses likely to go into insolvency, many tenants will be negotiating from a position of strength. A landlord will have to consider the prospects of being left with vacant premises for a considerable period of time, the costs of having to carry out any improvements in order to relet, the costs of reletting, the costs of ongoing rates, and perhaps a share of service charges and repairs and maintenance for a long period of time.
Each area and building is different, so you should assess the likelihood of the landlord wanting to take back the premises. There could be a risk that the landlord has their own agenda for wanting to bring your lease to an end, perhaps in order to redevelop the property or occupy it for their own use.