RICS Dispute Resolution Application Fee - VAT adjustment
16/12/09 12:24 Topics Rent Review
| Arbitration
With effect from 1 January 2010, the application fee
payable to the RICS is £361 (inclusive of VAT at
17.5%)
I am putting the finishing touches to my new Dispute Resolution Service, Dr.Review, and full details will be announced shortly.
I am putting the finishing touches to my new Dispute Resolution Service, Dr.Review, and full details will be announced shortly.
Dispute resolution costs and fees
27/10/09 09:18 Topics Arbitration
| Rent Review
Dispute resolution costs and fees
In my opinion, and I'm not alone, the fees required and charged by surveyors appointed by the RICS to act as arbitrators or independent experts are often out of touch with reality and, in many instances, obscene.
For example, I am dealing with two matters at present, for different clients, where the rents are likely to end up at around £14,500 pa. In each case, the independent expert wants to charge around £250-£300 an hour, with a minimum fee of £3500 + disbursements and VAT. Now if the agency side of the firms of which those experts are partners were instructed to let the property then chances are the commission would be 10% of the first year's rent (ignoring any rent-free) subject to a minimum commission of £2000 plus VAT.
In another case, the appointed independent expert's hourly rate is £200 an hour + disbursements and VAT. Okay, maybe that's par for the course (or at least it used to be), but the surveyor has run up a bill of almost £1000 + VAT, etc just on dealing with preliminary communications. Also, at a different office of same company, where another person has been appointed, the charge is (only) £175 an hour which, considering it's the same administrative structure, suggests to me some sort of target approach to revenue.
I don't know where such people think the money comes from to pay their fees but frankly if that's the way they carry on then it's hardly surprising so many surveyors are experiencing financial difficulties and having to lay off staff, etc.
It's always been the case that where the parties have no choice the adviser will charge as much as they possibly can. You get that with legal costs and surveyor's fees in connection with tenant applications for licences to assign, sub-let, do alterations, and with schedules of dilapidations. I think the same principle is being applied at review referrals. Once appointed, the surveyor has a general duty to proceed and although that can be stopped by agreement what the parties have little or no control over is how much the surveyor will charge.
Personally, and I've said this all along, I think there should be a fixed fee, possibly on a sliding scale according to the level of passing rent, (with adjustment if the passing rent is a ground rent, for example), for independent expert determinations and arbitrator awards at rent review. The old argument it's impossible to know what will be involved doesn't hold water. When I take on a rent review for a client, I don't have the luxury of being able to charge whatever I like: I quote a fee at the start and no matter how long the job takes or what's involved, I stick to what has been agreed and no more.
An open-ended 'blank cheque' approach exposes both landlord and tenant to the risk of having to pay a disproportionate amount to a third party, which let's face it, particularly with an independent expert, expects most of the job done for them.
The advantage of a fixed fee is that you know where you are the start. You can tell the client it would cost 'x' to go to referral and that would be it. At present, I can only estimate and having to say that the total costs could be in the region of £3000-£5000 + VAT, etc is a really frightening figure for most people, even if their share would only amount to half of that.
Under the existing system whereby surveyors can charge whatever they like, I think landlords and tenants are being taken for a ride.
PS - I am in the process of setting up a low cost dispute resolution service where, for example, I am likely to charge in the region of £1750 + VAT for expert determination and maybe the same for arbitration. The full fee would, of course, not be payable in the event the matter were settled beforehand.
In my opinion, and I'm not alone, the fees required and charged by surveyors appointed by the RICS to act as arbitrators or independent experts are often out of touch with reality and, in many instances, obscene.
For example, I am dealing with two matters at present, for different clients, where the rents are likely to end up at around £14,500 pa. In each case, the independent expert wants to charge around £250-£300 an hour, with a minimum fee of £3500 + disbursements and VAT. Now if the agency side of the firms of which those experts are partners were instructed to let the property then chances are the commission would be 10% of the first year's rent (ignoring any rent-free) subject to a minimum commission of £2000 plus VAT.
In another case, the appointed independent expert's hourly rate is £200 an hour + disbursements and VAT. Okay, maybe that's par for the course (or at least it used to be), but the surveyor has run up a bill of almost £1000 + VAT, etc just on dealing with preliminary communications. Also, at a different office of same company, where another person has been appointed, the charge is (only) £175 an hour which, considering it's the same administrative structure, suggests to me some sort of target approach to revenue.
I don't know where such people think the money comes from to pay their fees but frankly if that's the way they carry on then it's hardly surprising so many surveyors are experiencing financial difficulties and having to lay off staff, etc.
It's always been the case that where the parties have no choice the adviser will charge as much as they possibly can. You get that with legal costs and surveyor's fees in connection with tenant applications for licences to assign, sub-let, do alterations, and with schedules of dilapidations. I think the same principle is being applied at review referrals. Once appointed, the surveyor has a general duty to proceed and although that can be stopped by agreement what the parties have little or no control over is how much the surveyor will charge.
Personally, and I've said this all along, I think there should be a fixed fee, possibly on a sliding scale according to the level of passing rent, (with adjustment if the passing rent is a ground rent, for example), for independent expert determinations and arbitrator awards at rent review. The old argument it's impossible to know what will be involved doesn't hold water. When I take on a rent review for a client, I don't have the luxury of being able to charge whatever I like: I quote a fee at the start and no matter how long the job takes or what's involved, I stick to what has been agreed and no more.
An open-ended 'blank cheque' approach exposes both landlord and tenant to the risk of having to pay a disproportionate amount to a third party, which let's face it, particularly with an independent expert, expects most of the job done for them.
The advantage of a fixed fee is that you know where you are the start. You can tell the client it would cost 'x' to go to referral and that would be it. At present, I can only estimate and having to say that the total costs could be in the region of £3000-£5000 + VAT, etc is a really frightening figure for most people, even if their share would only amount to half of that.
Under the existing system whereby surveyors can charge whatever they like, I think landlords and tenants are being taken for a ride.
PS - I am in the process of setting up a low cost dispute resolution service where, for example, I am likely to charge in the region of £1750 + VAT for expert determination and maybe the same for arbitration. The full fee would, of course, not be payable in the event the matter were settled beforehand.
Appearance of bias should cease
26/10/09 15:47 Topics Arbitration
Dispute resolution costs and fees
In my opinion, and I'm not alone, the fees required and charged by surveyors appointed by the RICS to act as arbitrators or independent experts are often out of touch with reality and, in many instances, obscene.
For example, I am dealing with two matters at present, for different clients, where the rents are likely to end up at around £14,500 pa. In each case, the independent expert wants to charge around £250-£300 an hour, with a minimum fee of £3500 + disbursements and VAT. Now if the agency side of the firms of which those experts are partners were instructed to let the property then chances are the commission would be 10% of the first year's rent (ignoring any rent-free) subject to a minimum commission of £2000 plus VAT.
In another case, the appointed independent expert's hourly rate is £200 an hour + disbursements and VAT. Okay, maybe that's par for the course (or at least it used to be), but the surveyor has run up a bill of almost £1000 + VAT, etc just on dealing with preliminary communications. Also, at a different office of same company, where another person has been appointed, the charge is (only) £175 an hour which, considering it's the same administrative structure, suggests to me some sort of target approach to revenue.
I don't know where such people think the money comes from to pay their fees but frankly if that's the way they carry on then it's hardly surprising so many surveyors are experiencing financial difficulties and having to lay off staff, etc.
It's always been the case that where the parties have no choice the adviser will charge as much as they possibly can. You get that with legal costs and surveyor's fees in connection with tenant applications for licences to assign, sub-let, do alterations, and with schedules of dilapidations. I think the same principle is being applied at review referrals. Once appointed, the surveyor has a general duty to proceed and although that can be stopped by agreement what the parties have little or no control over is how much the surveyor will charge.
Personally, and I've said this all along, I think there should be a fixed fee, possibly on a sliding scale according to the level of passing rent, (with adjustment if the passing rent is a ground rent, for example), for independent expert determinations and arbitrator awards at rent review. The old argument it's impossible to know what will be involved doesn't hold water. When I take on a rent review for a client, I don't have the luxury of being able to charge whatever I like: I quote a fee at the start and no matter how long the job takes or what's involved, I stick to what has been agreed and no more.
An open-ended 'blank cheque' approach exposes both landlord and tenant to the risk of having to pay a disproportionate amount to a third party, which let's face it, particularly with an independent expert, expects most of the job done for them.
I should like to set up a low cost referral service where, for example, one would charge in the region of £1000 + VAT for expert determination assuming the matter straightforward and maybe the same for arbitration. I could set up such a service and rely on the provision in many leases where the parties can appoint a surveyor without having to go through the RICS. What you think? Would you like me to?
The advantage of a fixed fee is that you know where you are the start. You can tell the client it would cost 'x' to go to referral and that would it. At present, I can only estimate and having to say that the total costs could be in the region of £3000-£5000 + VAT, etc is a really frightening figure for most people, even if their share would only amount to half of that.
Do please comment. The RICS won't get involved but I think they'd have to sit up and take notice and do something about it if more and more landlords and tenants were to register their disapproval and clamour for a lower cost system. As it is, I think landlords and tenants are being taken for a ride.
In my opinion, and I'm not alone, the fees required and charged by surveyors appointed by the RICS to act as arbitrators or independent experts are often out of touch with reality and, in many instances, obscene.
For example, I am dealing with two matters at present, for different clients, where the rents are likely to end up at around £14,500 pa. In each case, the independent expert wants to charge around £250-£300 an hour, with a minimum fee of £3500 + disbursements and VAT. Now if the agency side of the firms of which those experts are partners were instructed to let the property then chances are the commission would be 10% of the first year's rent (ignoring any rent-free) subject to a minimum commission of £2000 plus VAT.
In another case, the appointed independent expert's hourly rate is £200 an hour + disbursements and VAT. Okay, maybe that's par for the course (or at least it used to be), but the surveyor has run up a bill of almost £1000 + VAT, etc just on dealing with preliminary communications. Also, at a different office of same company, where another person has been appointed, the charge is (only) £175 an hour which, considering it's the same administrative structure, suggests to me some sort of target approach to revenue.
I don't know where such people think the money comes from to pay their fees but frankly if that's the way they carry on then it's hardly surprising so many surveyors are experiencing financial difficulties and having to lay off staff, etc.
It's always been the case that where the parties have no choice the adviser will charge as much as they possibly can. You get that with legal costs and surveyor's fees in connection with tenant applications for licences to assign, sub-let, do alterations, and with schedules of dilapidations. I think the same principle is being applied at review referrals. Once appointed, the surveyor has a general duty to proceed and although that can be stopped by agreement what the parties have little or no control over is how much the surveyor will charge.
Personally, and I've said this all along, I think there should be a fixed fee, possibly on a sliding scale according to the level of passing rent, (with adjustment if the passing rent is a ground rent, for example), for independent expert determinations and arbitrator awards at rent review. The old argument it's impossible to know what will be involved doesn't hold water. When I take on a rent review for a client, I don't have the luxury of being able to charge whatever I like: I quote a fee at the start and no matter how long the job takes or what's involved, I stick to what has been agreed and no more.
An open-ended 'blank cheque' approach exposes both landlord and tenant to the risk of having to pay a disproportionate amount to a third party, which let's face it, particularly with an independent expert, expects most of the job done for them.
I should like to set up a low cost referral service where, for example, one would charge in the region of £1000 + VAT for expert determination assuming the matter straightforward and maybe the same for arbitration. I could set up such a service and rely on the provision in many leases where the parties can appoint a surveyor without having to go through the RICS. What you think? Would you like me to?
The advantage of a fixed fee is that you know where you are the start. You can tell the client it would cost 'x' to go to referral and that would it. At present, I can only estimate and having to say that the total costs could be in the region of £3000-£5000 + VAT, etc is a really frightening figure for most people, even if their share would only amount to half of that.
Do please comment. The RICS won't get involved but I think they'd have to sit up and take notice and do something about it if more and more landlords and tenants were to register their disapproval and clamour for a lower cost system. As it is, I think landlords and tenants are being taken for a ride.
Base Rate and Interest Rates
26/10/09 15:37 Topics Investment
| Rent Review
Interest Rates
Base Rate 0.5% as at 26 October 2009
For a list of MLR and Base Rate changes since 1989, please click here
Base Rate 0.5% as at 26 October 2009
For a list of MLR and Base Rate changes since 1989, please click here
Take-away food shops - planning restrictions
26/10/09 15:35 Topics Rent Review
| Investment
Take-away food shops planning
restrictions
LB Waltham Forest has introduced a policy, likely to be copied by other planning authorities, of not allowing take-away food shops to open within 400 metres of schools, parks and youth centres. Also, the North East London planning authority has begun consulting on a suite of development control policies which would restrict the number of fast-food outlets within primary, secondary and retail parade zones.
Until the 400-mere rule becomes a nationally-adopted planning policy, the point would only arise within LB Waltham Forest. In the meantime, to prepare for the possibility:
At rent review in the lease of premises whereby the permitted user is take-away foods - Use Class A5 is hot food takeaway, and possibly A3 - an assumption of the hypothetical tenant being able to get planning permission for such use is normal. If the premises are within 400 metres of a school, park and youth-centre, then in the open market the assumption would fail in practice. That could have the effect of either increasing the market rent, on the basis that if the premises did not already have take-away use then it would not be allowed, in which case there is a scarcity value, or reducing the market rent on the basis that in the market such planning use would not be allowed.
At lease expiry, if the tenant requires a lower rent or it will not renew, the landlord will have to weigh up the consequences of conceding a lower rent against the risk not being able to re-let the premises for take-away use if the planning permission for such use were to elapse.
There are thousands of take-away food shops. As literal interpretation of the lease has given way to presumption in favour of reality, checking the distance to the nearest school, park and youth-centre will be necessary when evaluating the rent.
LB Waltham Forest has introduced a policy, likely to be copied by other planning authorities, of not allowing take-away food shops to open within 400 metres of schools, parks and youth centres. Also, the North East London planning authority has begun consulting on a suite of development control policies which would restrict the number of fast-food outlets within primary, secondary and retail parade zones.
Until the 400-mere rule becomes a nationally-adopted planning policy, the point would only arise within LB Waltham Forest. In the meantime, to prepare for the possibility:
At rent review in the lease of premises whereby the permitted user is take-away foods - Use Class A5 is hot food takeaway, and possibly A3 - an assumption of the hypothetical tenant being able to get planning permission for such use is normal. If the premises are within 400 metres of a school, park and youth-centre, then in the open market the assumption would fail in practice. That could have the effect of either increasing the market rent, on the basis that if the premises did not already have take-away use then it would not be allowed, in which case there is a scarcity value, or reducing the market rent on the basis that in the market such planning use would not be allowed.
At lease expiry, if the tenant requires a lower rent or it will not renew, the landlord will have to weigh up the consequences of conceding a lower rent against the risk not being able to re-let the premises for take-away use if the planning permission for such use were to elapse.
There are thousands of take-away food shops. As literal interpretation of the lease has given way to presumption in favour of reality, checking the distance to the nearest school, park and youth-centre will be necessary when evaluating the rent.
Rent Review - upward or downward
26/10/09 15:33 Topics Rent Review
Upwards or downward - rent review
Many tenants, and I should imagine landlords also, probably think that where a rent review is 'upward' or 'downward', so that the rent payable after the review could be less than before, the rent is likely to go down, in the prevailing economic climate.
That may not be so. For a landlord, for whom I have acted for years, I recently negotiated a 10% increase in rent for a September 2008 review even though the lease contains a downward provision.
The important thing to remember is that rents are not based on what the actual tenant could afford or the actual landlord might want, but upon comparison. Where the evidence is of rents whose reviews are upward-only, a nil increase (which, as I have said before, is no evidence of a lower rent) does not mean rents have fallen. Also, it is not only another rent (pro-rata) to which a review is compared, but also the terms of the lease. When you make a comparison between an upward only review clause and an upward/downwards clause, it is reasonable to assume a tenant would be attracted by the prospect of a lease containing upward/downward clause and paying a greater rent for the premises than if the review were upward only.
So, if all the evidence is nil increase, which as I've said does not mean the rent has gone down, then in the absence of proof that rents have indeed fallen, the advantage of having an upward/downward review has a value. Which in this case I agreed at 10% more.
Many tenants, and I should imagine landlords also, probably think that where a rent review is 'upward' or 'downward', so that the rent payable after the review could be less than before, the rent is likely to go down, in the prevailing economic climate.
That may not be so. For a landlord, for whom I have acted for years, I recently negotiated a 10% increase in rent for a September 2008 review even though the lease contains a downward provision.
The important thing to remember is that rents are not based on what the actual tenant could afford or the actual landlord might want, but upon comparison. Where the evidence is of rents whose reviews are upward-only, a nil increase (which, as I have said before, is no evidence of a lower rent) does not mean rents have fallen. Also, it is not only another rent (pro-rata) to which a review is compared, but also the terms of the lease. When you make a comparison between an upward only review clause and an upward/downwards clause, it is reasonable to assume a tenant would be attracted by the prospect of a lease containing upward/downward clause and paying a greater rent for the premises than if the review were upward only.
So, if all the evidence is nil increase, which as I've said does not mean the rent has gone down, then in the absence of proof that rents have indeed fallen, the advantage of having an upward/downward review has a value. Which in this case I agreed at 10% more.
Distressed sellers
01/10/09 15:38 Topics Investment
"Distressed" seller is the latest way for sellers to
get rid of rubbish. The sort of properties that
nobody else would buy. Start off by putting on the
market over-priced. Expect to sell for much less.
Attract interest, consider offers much lower than
the quoting price. Do some due diligence as
to whether the buyer has the money. Agree to accept
what is thought by the buyer to be a bargain price.
Exchange and complete contracts as soon as possible.
Everyone is happy.
Retailers in administration and receivership
18/09/09 15:42 Topics Investment
| News
For a list of multiples retailers in receivership,
administration, etc since 2002, please
click this
link:
Credit Crunch time time
Time-Line Credit Crunch
For a list of important dates pertaining to the credit-crunch, together with a list of multiples retailers in receivership, administration, etc since 2002, please click this link:
For a list of important dates pertaining to the credit-crunch, together with a list of multiples retailers in receivership, administration, etc since 2002, please click this link:
Sub-lease implications
01/09/09 15:40 Topics Lease
Renewal
Sub-lease implications
Multiple retailers, particularly, with premises that are surplus to requirements frequently sub-let, rather than assign the leases. Why? There are many reasons. For example:
1) the risk of assignment is that in the event of assignee default, the lease could revert to the assignor at any time. [Although leases containing Authorised Guarantee Agreements only revert to the assignor in the event of assignee default, older leases are subject to the original rules of privity of contract, so would revert to the original tenant, regardless of how many assignments have taken place, and with the assignor having no rights to reoccupy the premises.]
2) The financial standing of the assignee might not satisfy the freeholder's criteria.
3) Once assigned, it would not normally be possible for the assignor to take the premises back were the assignor to want to re-occupy the premises in future.
4) Any use to which an assignee or future assignee might put the premises could, assuming no restriction in the lease, risk creating a competitor for the assignor's business in the locality.
On balance, sub-letting is an opportunity to charge a profit rent, and enables the tenant to keep control of the lease. The risk of sub-tenant default or delay in paying the rent still exists, but the tenant would control what to do, rather than the landlord.
Generally, where a lease allows the tenant to sub-let, the required outline terms and conditions of any underlease are stated in the lease. Although modern leases may require any under-lease to be outside the Landlord and Tenant Act 1954, often older leases do not. That means that provided the under-lease would qualify for renewal rights on expiry, and assuming the under-lessee wants to renew and the superior landlord does not oppose renewal, the under-lessee would become the direct tenant of the superior landlord.
Regardless of the conditions required by the lease, on grant of under-lease, it is not unusual for strictures of full repairing and decorating obligations to be eased by a schedule of condition or similar. In such cases, the under-lessee should be aware that, unless the underlease is worded correctly, the commercial value of a schedule of condition will end on expiry of the contractual term of underlease, and not continue into any statutory continuation or holding over period. Furthermore, provided the under-lessee is in occupation of the premises on expiry, (and the superior landlord does not oppose renewal, and renewal rights are protected), it should be possible for the terms and conditions of the underlease to be reflected in the terms and conditions of the renewal lease. So, the renewal lease could also contain a schedule of condition.
The risk/cost of managing surplus estate and onerous leases can mount up to become a noticeable provision on the balance-sheet, so retailers like to be rid of the commitment by assigning them, either to third parties, or more likely to their under-lessees. Where an under-lease contains a schedule of condition, the lessor/assignor will normally agree to indemnify the under-lessee for the cost of compliance with the difference between the full repairing covenant and the schedule of condition so that, in practice, the underlesee/to-be-assignee is in no worse a position.
However, unless careful consideration is given to the long-term and wider consequences, the position could be a lot worse. The under-lessee should ensure the indemnity covers any statutory continuation or holding over period of the lease. Also, the under-lessee should note that, on expiry and renewal, it would be the terms and conditions of the lease (assigned) that form the basis for the valuation aspects of s.34 and s.35 Landlord and Tenant Act 1954, and not the terms and conditions of the underlease. In other words, by taking over the lease, the under-lessee would be losing the right to renew on the same terms and conditions of the underlease, the schedule of condition not carried forward.
The total cost of putting a property in a state of repair and decoration as envisaged by the lease can be considerable. It is not only the actual expense for the works but also the attendant costs and fees payable to lawyers and surveyors for the landlord, as well as the tenant's advisers.
Multiple retailers, particularly, with premises that are surplus to requirements frequently sub-let, rather than assign the leases. Why? There are many reasons. For example:
1) the risk of assignment is that in the event of assignee default, the lease could revert to the assignor at any time. [Although leases containing Authorised Guarantee Agreements only revert to the assignor in the event of assignee default, older leases are subject to the original rules of privity of contract, so would revert to the original tenant, regardless of how many assignments have taken place, and with the assignor having no rights to reoccupy the premises.]
2) The financial standing of the assignee might not satisfy the freeholder's criteria.
3) Once assigned, it would not normally be possible for the assignor to take the premises back were the assignor to want to re-occupy the premises in future.
4) Any use to which an assignee or future assignee might put the premises could, assuming no restriction in the lease, risk creating a competitor for the assignor's business in the locality.
On balance, sub-letting is an opportunity to charge a profit rent, and enables the tenant to keep control of the lease. The risk of sub-tenant default or delay in paying the rent still exists, but the tenant would control what to do, rather than the landlord.
Generally, where a lease allows the tenant to sub-let, the required outline terms and conditions of any underlease are stated in the lease. Although modern leases may require any under-lease to be outside the Landlord and Tenant Act 1954, often older leases do not. That means that provided the under-lease would qualify for renewal rights on expiry, and assuming the under-lessee wants to renew and the superior landlord does not oppose renewal, the under-lessee would become the direct tenant of the superior landlord.
Regardless of the conditions required by the lease, on grant of under-lease, it is not unusual for strictures of full repairing and decorating obligations to be eased by a schedule of condition or similar. In such cases, the under-lessee should be aware that, unless the underlease is worded correctly, the commercial value of a schedule of condition will end on expiry of the contractual term of underlease, and not continue into any statutory continuation or holding over period. Furthermore, provided the under-lessee is in occupation of the premises on expiry, (and the superior landlord does not oppose renewal, and renewal rights are protected), it should be possible for the terms and conditions of the underlease to be reflected in the terms and conditions of the renewal lease. So, the renewal lease could also contain a schedule of condition.
The risk/cost of managing surplus estate and onerous leases can mount up to become a noticeable provision on the balance-sheet, so retailers like to be rid of the commitment by assigning them, either to third parties, or more likely to their under-lessees. Where an under-lease contains a schedule of condition, the lessor/assignor will normally agree to indemnify the under-lessee for the cost of compliance with the difference between the full repairing covenant and the schedule of condition so that, in practice, the underlesee/to-be-assignee is in no worse a position.
However, unless careful consideration is given to the long-term and wider consequences, the position could be a lot worse. The under-lessee should ensure the indemnity covers any statutory continuation or holding over period of the lease. Also, the under-lessee should note that, on expiry and renewal, it would be the terms and conditions of the lease (assigned) that form the basis for the valuation aspects of s.34 and s.35 Landlord and Tenant Act 1954, and not the terms and conditions of the underlease. In other words, by taking over the lease, the under-lessee would be losing the right to renew on the same terms and conditions of the underlease, the schedule of condition not carried forward.
The total cost of putting a property in a state of repair and decoration as envisaged by the lease can be considerable. It is not only the actual expense for the works but also the attendant costs and fees payable to lawyers and surveyors for the landlord, as well as the tenant's advisers.
Good time to invest?
01/09/09 15:38 Topics Investment
It seems to me there are a growing number of people
thinking to themselves now seems like a good time to
invest in shop property. But I'm not convinced. Not
because life's difficult for many retailers, and that
for many struggling on in the hope of surviving is
possibly about the best they can do, but that that
the sort of property on the market for sale doesn't
fill me with much enthusiasm for its investment
potential.
Unlike the stock market, where you're buying a share of the company's business, with property you are not. You are simply buying the building in or which which the tenant runs its business. Whether the tenant intends to remain there is not something you are entitled to know and the tenant is not obliged to keep you informed. The only time the tenant has to tell you it is going is when it applies to assign the lease, sub-let the property, or does not renew the lease on expiry. And/or, in the case of a ltd company or plc, when it puts the occupant tenant in liquidation, administration or a CVA. Therefore, when you buy a shop property investment, you are placing a good deal of trust on the fact the tenant will continue to be the tenant for at least as long as the price you pay is commensurate with the value you have placed on the property per that price you have paid. For example, if the price you pay equates to 7% yield then to maintain that value, all other factors remaining constant, the tenant or a tenant of at least the calibre (if the lease were assigned and/or the property re-let) would have to remain the tenant for just over 14 years. If not, if any future tenant within that 14 year period is of a lesser calibre, then the value of the property would be less (all other factors remaining constant).
Buying a property let on 20 year lease is not the answer. Generally, retail property is a depreciating asset and the shorter the term the greater the yield. A property let to Barclays Bank plc, for example, on leaseback for 20 years from 2009 will likely fetch a higher price than if the term remaining is only a few years before expiry.
There is a difference between the return or yield you can get based on what you pay and whether the investment is worth buying in the first place. I think many people are not realising they are falling into the trap of the first. And it is a trap, believe me, because what it leads to is becoming stuck with something that is really only resalable at the same sort of price now.
Unlike the stock market, where you're buying a share of the company's business, with property you are not. You are simply buying the building in or which which the tenant runs its business. Whether the tenant intends to remain there is not something you are entitled to know and the tenant is not obliged to keep you informed. The only time the tenant has to tell you it is going is when it applies to assign the lease, sub-let the property, or does not renew the lease on expiry. And/or, in the case of a ltd company or plc, when it puts the occupant tenant in liquidation, administration or a CVA. Therefore, when you buy a shop property investment, you are placing a good deal of trust on the fact the tenant will continue to be the tenant for at least as long as the price you pay is commensurate with the value you have placed on the property per that price you have paid. For example, if the price you pay equates to 7% yield then to maintain that value, all other factors remaining constant, the tenant or a tenant of at least the calibre (if the lease were assigned and/or the property re-let) would have to remain the tenant for just over 14 years. If not, if any future tenant within that 14 year period is of a lesser calibre, then the value of the property would be less (all other factors remaining constant).
Buying a property let on 20 year lease is not the answer. Generally, retail property is a depreciating asset and the shorter the term the greater the yield. A property let to Barclays Bank plc, for example, on leaseback for 20 years from 2009 will likely fetch a higher price than if the term remaining is only a few years before expiry.
There is a difference between the return or yield you can get based on what you pay and whether the investment is worth buying in the first place. I think many people are not realising they are falling into the trap of the first. And it is a trap, believe me, because what it leads to is becoming stuck with something that is really only resalable at the same sort of price now.
Monthly Rents
01/09/09 15:36 Topics Rent Review
| Investment
Monthly Rents
Although retailers in trouble are managing to persuade landlords to accept rents paid monthly, a growing number of retailers that are not in any difficulty are expecting the same treatment.
Some landlords can afford to be accommodating, but many cannot. Landlords that themselves are borrowing money are likely to be paying their interest quarterly, so accepting rents monthly from the tenant will mean the landlord subsidising the tenant.
In any event, such an arrangement, where it is a departure from the the terms and conditions of the lease, should only be temporary, and subject to notice to end the arrangement if the landlord should so desire. Landlords should also put the agreement in writing, in a side-letter with the lease, setting out clearly the terms and conditions of the arrangement.
To avoid problems should the landlord want to sell the investment, the arrangement should be personal to the tenant and landlord and non-transferable.
In my opinion, the investment value of a property where the tenant is being allowed to pay monthly could well be lower than where payments are quarterly.
Although retailers in trouble are managing to persuade landlords to accept rents paid monthly, a growing number of retailers that are not in any difficulty are expecting the same treatment.
Some landlords can afford to be accommodating, but many cannot. Landlords that themselves are borrowing money are likely to be paying their interest quarterly, so accepting rents monthly from the tenant will mean the landlord subsidising the tenant.
In any event, such an arrangement, where it is a departure from the the terms and conditions of the lease, should only be temporary, and subject to notice to end the arrangement if the landlord should so desire. Landlords should also put the agreement in writing, in a side-letter with the lease, setting out clearly the terms and conditions of the arrangement.
To avoid problems should the landlord want to sell the investment, the arrangement should be personal to the tenant and landlord and non-transferable.
In my opinion, the investment value of a property where the tenant is being allowed to pay monthly could well be lower than where payments are quarterly.
Rent review in the present climate
21/05/09 18:30 Topics Rent Review
| News
3CPD, a registered charity
www.3cpd.co.uk
invited me to give a talk about "Rent Review in the
Prevailing Climate" on 21 May 2009 at the Barcelo
Hotel, Oxford. Open to non-members,
approximately 30 people attended the
event.
RICS dispute resolution fee
15/04/09 09:17 Topics Rent Review
| Arbitration
RICS dispute resolution application fee
15 April 2009 - for rent review dispute resolution, the RICS application fee (for appointment of an arbitrator and independent expert) is now £333.00, inclusive of VAT 15%
Previously:
2000 April - £275 inclusive of VAT
2002 August - £300 inclusive of VAT
2006 June - £320 inclusive of VAT
2008 April - £340.00 inclusive VAT
Effective 15 June 2009, the application fee payable to the RICS for the appointment of an arbitrator or independent expert increased to £353.00 inclusive of VAT (£306.96 exclusive of VAT).
So much for helping to reduce the costs of dispute resolution. To be fair, the RICS is only interested in maximum revenue for itself and its members. As it says:
‘The economy still faces hard times ahead, but the future for RICS dispute resolvers looks encouraging. It is crucial that those who represent this facet of RICS maintain the highest high quality, and show real commitment to that end. ’
I am in the process of finalising the launch of an alternative and low-cost dispute resolution service for rent reviews of my own.
15 April 2009 - for rent review dispute resolution, the RICS application fee (for appointment of an arbitrator and independent expert) is now £333.00, inclusive of VAT 15%
Previously:
2000 April - £275 inclusive of VAT
2002 August - £300 inclusive of VAT
2006 June - £320 inclusive of VAT
2008 April - £340.00 inclusive VAT
Effective 15 June 2009, the application fee payable to the RICS for the appointment of an arbitrator or independent expert increased to £353.00 inclusive of VAT (£306.96 exclusive of VAT).
So much for helping to reduce the costs of dispute resolution. To be fair, the RICS is only interested in maximum revenue for itself and its members. As it says:
‘The economy still faces hard times ahead, but the future for RICS dispute resolvers looks encouraging. It is crucial that those who represent this facet of RICS maintain the highest high quality, and show real commitment to that end. ’
I am in the process of finalising the launch of an alternative and low-cost dispute resolution service for rent reviews of my own.
Pre-pack administration
01/03/09 15:39 Topics Investment
My letter published in Estates Gazette, March 2009:
"Whilst I agree with Anthony Ratliffe there seems precious little difference between “phoenix” company and “pre-packs”, I do think landlords could do both themselves and the shop property sector a service by adopting a more robust approach to requests for assignment.
Generally, alienation criteria in a lease enable a landlord to require a director surety or guarantor as a pre-requisite for consent for assignment. Generally, multiple retailers are unwilling to provide personal guarantors but, since the pre-pack company is effectively a new business with no trading record, there is no reason to treat it any differently.
In my opinion, landlords are being presented with a rare possibly unique opportunity to influence the future of retailing and the structure of property costs in the UK. By refusing consent to assign to a pre-pack unless personal guarantor(s) are provided, multiple retailers are less likely to embark upon debt-fuelled jamborees, if their own personal money were on the line. One reason there is now a legacy of high rents in most places is not a consequence of supply and demand, so much as the knock-on effect of rental evidence caused overambitious
egocentric retailers living off borrowings and overpaying for new lettings with no
thought for the long-term wider consequences.
Increasingly, I am taking the view that comparable evidence at rent review involving a transaction where the lease is to a company without a personal guarantor should be treated with the utmost caution, because the rent is likely to be higher.
In my opinion, multiple retailers allowing branches to underperform, such that they have to be ditched using pre-packaged practices, is tantamount to gross incompetence at the highest level. It is also a poor reflection on the investment acumen of innumerable landlords in allowing multiple retailers to be exempt or shielded from the strictures of tenancy management that are automatically applied to small businesses."
"Whilst I agree with Anthony Ratliffe there seems precious little difference between “phoenix” company and “pre-packs”, I do think landlords could do both themselves and the shop property sector a service by adopting a more robust approach to requests for assignment.
Generally, alienation criteria in a lease enable a landlord to require a director surety or guarantor as a pre-requisite for consent for assignment. Generally, multiple retailers are unwilling to provide personal guarantors but, since the pre-pack company is effectively a new business with no trading record, there is no reason to treat it any differently.
In my opinion, landlords are being presented with a rare possibly unique opportunity to influence the future of retailing and the structure of property costs in the UK. By refusing consent to assign to a pre-pack unless personal guarantor(s) are provided, multiple retailers are less likely to embark upon debt-fuelled jamborees, if their own personal money were on the line. One reason there is now a legacy of high rents in most places is not a consequence of supply and demand, so much as the knock-on effect of rental evidence caused overambitious
egocentric retailers living off borrowings and overpaying for new lettings with no
thought for the long-term wider consequences.
Increasingly, I am taking the view that comparable evidence at rent review involving a transaction where the lease is to a company without a personal guarantor should be treated with the utmost caution, because the rent is likely to be higher.
In my opinion, multiple retailers allowing branches to underperform, such that they have to be ditched using pre-packaged practices, is tantamount to gross incompetence at the highest level. It is also a poor reflection on the investment acumen of innumerable landlords in allowing multiple retailers to be exempt or shielded from the strictures of tenancy management that are automatically applied to small businesses."