6 minute read
Big Interview
“Where the tenant of a commercial property is struggling to meet their rental payments, they need to consider trying to negotiate concessions with their Landlord. As the recession starts to hit businesses across the Borough, mediation and renegotiation between Landlords and tenants will become a necessity to ensure both parties can weather the economic storm.’’ JM Commercial Chartered Surveyors are here to assist (see page 13 for further information)
Many commercial property tenants could be paying too much rent for their shop or office at a time when money may be tight. James Moorhouse of JM Commercial’s job is to help them ensure that this doesn’t happen.
A Wandsworth chartered surveyor and MD of JM Commercial, James has a wealth of industry experience behind him so it’s unsurprising that people tend to listen to what he has to say.
In the current challenging climate, commercial landlords and tenants need his advice more than ever. However, it’s not all doom and gloom; James believes that there are opportunities for landlords and tenants if they address crucial issues such as rent reviews, lease renewals and renegotiation of current lease terms. James started his career in 1996, working as a commercial agency surveyor for retail agency specialist Steven Smart & Co in London’s west end. He joined the commercial property team at Kinleigh Folkard and Hayward in 1998 – the same year he qualified as a chartered surveyor – and after gaining valuable experience in their office in Putney for 12 years he continued his agency career with them when they relocated to Wimbledon. By 2012 he decided it was time to take the plunge and set up on his own. JM Commercial provides advice in relation to rent reviews/lease renewals, valuations, lettings, sales and the acquisition of commercial and mixed-use property. Through a career spanning more than 22 years, James has built up an extensive client base, an enviable network of contacts and a wealth of knowledge in the commercial and residential property arenas. He’s also suitably qualified to offer professional property and legal services including statutory and “red book” valuations, rent reviews /lease renewals and expert witness work, as well as professional advice on landlord and tenant disputes, development sites, and investment properties. James says: “One of the most common questions that should be asked, especially in a downturn, is whether or not the property is over-rented. This happens when the value of the property drops over time but the tenant is locked into a fixed rent over, say, five years. “As vacancy rates increase and tenants negotiate concessions and new lease terms by tactically threatening to operate their rights to break their leases, more negative evidence will be created. Consequently, more property will be perceived to be overrented; the market will start to rebalance. As tenants renew their leases, evidence of rental values going down in certain sectors will start to be unequivocal. “At rent review it’s traditional for the rent to be reviewed on an upward-only basis. The rent remains the same in the event it’s shown that the passing rent – in other words, the current rent – is the true market rent or it stays the same if it’s agreed that the premises are already over-rented. Upward and downward rent reviews for commercial property are very uncommon in the UK. Where the rent is deemed to be at the right level or too high, there will be what’s known as a nil increase. This phenomenon then breeds the potential for over-rented property during a recessionary period. “As the recession starts to hit, more and more property will become over-rented. Selling on existing leases will become difficult and incentives and inducements will need to be offered (by way of reverse premiums) to sub-tenants and assignees to compensate for the over-rented property leases they’re taking on.” Another area that landlords and tenants should consider is the prospect of rent reviews post-March 11 – just before lockdown in the UK. James says: “It’s important not to overlook the difference between upward only rent reviews and lease renewals. Where a lease is protected under the Landlord and Tenant Act 1954 (sections 24 to 28 inclusive) the tenant has the automatic right to renew his/ her lease; the landlord can only oppose this application for a new lease under certain circumstances. Upon lease renewal the rent can go up, stay the same or go down. “Given the current scarcity of rental evidence and the punitive impact of the COVID Act 2020, rent reviews and lease renewals due between early March 2020 and the present day are very much tenant-sided in the retail, restaurant, pub and office markets. Private medical and educational D1 occupiers have also been hit hard by legislation, mediagenerated hysteria and affordability.” Conversely, the industrial sector has seen considerable rental growth. Demand for space suitable for use as distribution hubs has increased to unprecedented levels, with the pre-COVID-19 scarcity of inner London industrial space serving to magnify the issue significantly. James adds: “However, where premises are physically or logistically unsuited for use for distribution purposes or where they have a significant amount of ancillary office space, there might be arguments to minimize the rental uplift.” In the current challenging climate, it could be better all round if landlords and tenants come to a sensible compromise that suits both parties. James says: “Where a tenant is struggling to survive, their landlord needs to assess whether they should try to make concessions to support the existing occupier or allow them to go into receivership. If landlords believe they will easily re-let the property at the same or at a higher rent, they are unlikely to offer any interim concessions. “However, if they anticipate a fall in rent and a reduction in occupier demand, they have to assess the cumulative cost of a lower rent, offering rent-free periods to secure a new letting, rental voids while the property is marketed, the cost of empty business rates liabilities, increased buildings insurance and a service charge shortfall. “They will also have letting agency fees and legal costs to factor in. To achieve a similar rent, the premises may need to be stripped out and refurbished. If the tenant is insolvent, the landlord will have to foot this cost, unless they are insured against it together with a loss of rent. “If the landlord has secured loans against the income stream from a property investment, their ability to service this debt and raise further finance will be impacted if their tenant defaults. If they accept a lower rent for, say, two years, they may still be far better off than burning their bridges with their tenant. As the furlough scheme ends, this dilemma is going to become more and more prevalent.”
