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Rent Review in the Prevailing Climate
Investment is about becoming financially better off. Investing in commercial property can be rewarding provided you know what you’re doing, otherwise risky. Commercial property is a generic term for all types of business premises; offices, factories, warehouses, shops, supermarkets, retail warehouses, factory outlets, trade counters, pubs, restaurants, and leisure. Essentially, a commercial property is a fixed asset whose investment value requires sufficient appreciation to at least counteract depreciation. Successful investment is about judicious choice and timing: what to buy, how much to pay, how to manage, when and how to sell. Generally, assuming the objective is investment, not development, landlords want both capital value and the rent to least keep pace with inflation. Property has a reputation as a long-term hedge against inflation, but not all properties make good investments. Any potential for capital gain and/or rental growth depends on the variables.
The tenant’s objective for the property is a marketing device for the tenant’s business. The tenant does not care about the landlord’s investment. When costs and overheads overshadow the advantages, the tenant moves on. During the tenancy, tenants want to reduce property costs and minimise liabilities but often at the expense of the landlord. To get landlords to be accommodating, tenants use manipulative tactics, such as claiming business is bad, not being able to afford more, and without concessions the tenant would go broke. Some landlords, especially when mortgaged to the hilt or petrified of voids, are so scared they’ll agree to anything. Many unrepresented landlords fall for tenant ploys. It is easy to be influenced by doom and gloom. Of the economy, hardly a day goes by without news of another business collapse or rationalisation, jobs lost. However, the economy rarely has any bearing on individual businesses. The total market for goods and services comprises sectors and segments. Businesses are not all in the same boat. The world does not owe the tenant a living. In my opinion, most problems are self–inflicted, through failure to address operational short-comings.
For landlords whose commercial property is in dire straits, any suggestion of rent review might seem alien. All property belongs to someone. There is nothing new about commercial property ending up in the wrong place: localities, ‘High Streets’, are not sacrosanct, buildings often out-last their useful shelf-life. Tenants go broke by not anticipating change, investors get it wrong by ignoring warning signs.
In stable and thriving areas of the commercial property market, landlords look forward to rent review. Presented with a plea for clemency, any decision whether to implement the review should be made after the rent is agreed or ascertained. To decide against on the basis of a sob–story invites the question ’how do you know it’s not a negotiating ploy? ’ By agreeing no increase without first exploring all the possibilities the landlord risks missing out on rent increase and capital growth. If the landlord could afford to, a lower rent payable could be accepted.
A rent review that’s ‘upward-only’ does not mean the rent necessarily has to go up, simply that after the market rent is agreed or ascertained the rent payable will not be less than the amount payable beforehand (assuming nothing else to the contrary). Since the market rent could be lower than rent payable, there could be repercussions for the investment value if the property were mortgaged. Many landlords commission surveyor reports on the likely rent at review but I consider such reports a waste of money. During negotiations, evidence can emerge that was not known about before, also psychology enters the fray. For example, most tenants are into commercial expediency so, even if there were no evidence, a nominal increase might be offered to avoid the cost of dispute resolution referral.
With commercial property, there is no standard form of lease. Leases are drafted from scratch, to the parties’ requirements, and often using precedents. [The Law Society has devised a short form of lease, but wording can be altered. ] Rent is the product of the terms and conditions of the tenancy upon which the premises are let. Wording should not always be taken literally: there may be overriding legislation, also words and phrases attract connotations; a different interpretation can often result in substantial increases or savings.
When a lease is granted, the terms and conditions are subjective, but the approach at review (assuming market rent, rather than inflation-adjusted, formulaic, or turnover-linked) is objective. Unlike on expiry where, (assuming the tenancy would qualify for renewal rights) rent is based on s. 34–s. 35 Landlord and Tenant Act 1954, a rent review during the term is based on a hypothetical lease, written in the review clause (and any related documents). Open market rent is not what the actual tenant could afford or how much the actual landlord might want, but what rent the premises would fetch if let in the market between a hypothetical willing landlord and hypothetical willing tenant. ’Hypothetical willing’ is defined in business tenancy law. The hypothetical lease may or may not contain the same terms and conditions as the lease so the outcome of the review might not be as envisaged. For example, if when the premises were let the rent reflected a limitation in use of the premises, then an unrestricted use in the hypothetical lease could result in a greater rent at review, all other factors remaining constant. Conversely, an assumed term without a break clause could result in a lower rent.
Where there is no evidence, the answer is to not value back-to-front. Comparable evidence is back-to front: it implies someone else agreed first and for the subject review to follow, pro-rata. Forward-thinking assesses rent by using either one of the other methodologies, or informed opinion. Informed opinion differs from letting agency ‘real-world’ experience because, unlike the actual market where they may be no demand, in the world of the hypothetical anything is possible.
The tenant’s objective for the property is a marketing device for the tenant’s business. The tenant does not care about the landlord’s investment. When costs and overheads overshadow the advantages, the tenant moves on. During the tenancy, tenants want to reduce property costs and minimise liabilities but often at the expense of the landlord. To get landlords to be accommodating, tenants use manipulative tactics, such as claiming business is bad, not being able to afford more, and without concessions the tenant would go broke. Some landlords, especially when mortgaged to the hilt or petrified of voids, are so scared they’ll agree to anything. Many unrepresented landlords fall for tenant ploys. It is easy to be influenced by doom and gloom. Of the economy, hardly a day goes by without news of another business collapse or rationalisation, jobs lost. However, the economy rarely has any bearing on individual businesses. The total market for goods and services comprises sectors and segments. Businesses are not all in the same boat. The world does not owe the tenant a living. In my opinion, most problems are self–inflicted, through failure to address operational short-comings.
For landlords whose commercial property is in dire straits, any suggestion of rent review might seem alien. All property belongs to someone. There is nothing new about commercial property ending up in the wrong place: localities, ‘High Streets’, are not sacrosanct, buildings often out-last their useful shelf-life. Tenants go broke by not anticipating change, investors get it wrong by ignoring warning signs.
In stable and thriving areas of the commercial property market, landlords look forward to rent review. Presented with a plea for clemency, any decision whether to implement the review should be made after the rent is agreed or ascertained. To decide against on the basis of a sob–story invites the question ’how do you know it’s not a negotiating ploy? ’ By agreeing no increase without first exploring all the possibilities the landlord risks missing out on rent increase and capital growth. If the landlord could afford to, a lower rent payable could be accepted.
A rent review that’s ‘upward-only’ does not mean the rent necessarily has to go up, simply that after the market rent is agreed or ascertained the rent payable will not be less than the amount payable beforehand (assuming nothing else to the contrary). Since the market rent could be lower than rent payable, there could be repercussions for the investment value if the property were mortgaged. Many landlords commission surveyor reports on the likely rent at review but I consider such reports a waste of money. During negotiations, evidence can emerge that was not known about before, also psychology enters the fray. For example, most tenants are into commercial expediency so, even if there were no evidence, a nominal increase might be offered to avoid the cost of dispute resolution referral.
With commercial property, there is no standard form of lease. Leases are drafted from scratch, to the parties’ requirements, and often using precedents. [The Law Society has devised a short form of lease, but wording can be altered. ] Rent is the product of the terms and conditions of the tenancy upon which the premises are let. Wording should not always be taken literally: there may be overriding legislation, also words and phrases attract connotations; a different interpretation can often result in substantial increases or savings.
When a lease is granted, the terms and conditions are subjective, but the approach at review (assuming market rent, rather than inflation-adjusted, formulaic, or turnover-linked) is objective. Unlike on expiry where, (assuming the tenancy would qualify for renewal rights) rent is based on s. 34–s. 35 Landlord and Tenant Act 1954, a rent review during the term is based on a hypothetical lease, written in the review clause (and any related documents). Open market rent is not what the actual tenant could afford or how much the actual landlord might want, but what rent the premises would fetch if let in the market between a hypothetical willing landlord and hypothetical willing tenant. ’Hypothetical willing’ is defined in business tenancy law. The hypothetical lease may or may not contain the same terms and conditions as the lease so the outcome of the review might not be as envisaged. For example, if when the premises were let the rent reflected a limitation in use of the premises, then an unrestricted use in the hypothetical lease could result in a greater rent at review, all other factors remaining constant. Conversely, an assumed term without a break clause could result in a lower rent.
Where there is no evidence, the answer is to not value back-to-front. Comparable evidence is back-to front: it implies someone else agreed first and for the subject review to follow, pro-rata. Forward-thinking assesses rent by using either one of the other methodologies, or informed opinion. Informed opinion differs from letting agency ‘real-world’ experience because, unlike the actual market where they may be no demand, in the world of the hypothetical anything is possible.
VAT and storage
"As from 1 October 2012, the VAT exemption for storage facilities was withdrawn on a blanket basis and VAT will automatically be payable on rent even if the option to tax has not been exercised.
VAT Information Sheet 10/13 was published on 9 August 2013 and clarified what was intended by the changes which came in on 1 October 2012. The IS states that the new rules apply to suppliers of “any facility which is used, or could potentially be used, by their customers for the storage of goods and customers who rent facilities to store goods”.
The IS clarifies that the changes do not just apply to “self-storage”, which could be narrowly defined as storage just by the end user, but storage by either the supply recipient (customer) or a third party with the customer`s permission if not under a separate supply (for VAT purpose).
The law refers to “facilities for the self-storage of goods” but the guidance states that the changes are not restricted to the type of storage where a small area within a dedicated building is rented by an individual to store their own personal property. The self-storage of goods, therefore, means any storage of goods by an end user.
Storage use includes physical storage, regardless of the supplier’s intention or any agreement between the parties, or storage implicitly intended from the nature of the premises, or commercial documentation in the absence of other actual use. If premises are used for more than one purpose, the rules on multiple and composite supplies will apply and there are examples contained in the IS.
The ramification for landlords is that, as the supplier of premises, they need to monitor the use to which the leased premises are put. Premises which are exempt from VAT in the normal case (and in respect of which no VAT election has been made) will become chargeable automatically for VAT in the event that the tenant, or a third party with the tenant’s permission, uses the whole or part of the premises for storage.
As is often the case, an absentee or institutional landlord will not know how the tenant is using the premises or permitting their use. The IS recommends that the landlord obtains and retains written confirmation of the use from the tenant. It will be necessary, in future, for all leases to contain a requirement for the tenant to supply such information, so that the landlord can comply with the law.
Where premises are sub-let, the head landlord will not need to charge VAT (in the absence of an election) but the intermediate landlord may need to begin to charge VAT if the sub-tenant or a third party with the sub-tenant’s consent (not a separate sub-underlessee or sub-licensee) begins to use the premises for storage. "
VAT Information Sheet 10/13 was published on 9 August 2013 and clarified what was intended by the changes which came in on 1 October 2012. The IS states that the new rules apply to suppliers of “any facility which is used, or could potentially be used, by their customers for the storage of goods and customers who rent facilities to store goods”.
The IS clarifies that the changes do not just apply to “self-storage”, which could be narrowly defined as storage just by the end user, but storage by either the supply recipient (customer) or a third party with the customer`s permission if not under a separate supply (for VAT purpose).
The law refers to “facilities for the self-storage of goods” but the guidance states that the changes are not restricted to the type of storage where a small area within a dedicated building is rented by an individual to store their own personal property. The self-storage of goods, therefore, means any storage of goods by an end user.
Storage use includes physical storage, regardless of the supplier’s intention or any agreement between the parties, or storage implicitly intended from the nature of the premises, or commercial documentation in the absence of other actual use. If premises are used for more than one purpose, the rules on multiple and composite supplies will apply and there are examples contained in the IS.
The ramification for landlords is that, as the supplier of premises, they need to monitor the use to which the leased premises are put. Premises which are exempt from VAT in the normal case (and in respect of which no VAT election has been made) will become chargeable automatically for VAT in the event that the tenant, or a third party with the tenant’s permission, uses the whole or part of the premises for storage.
As is often the case, an absentee or institutional landlord will not know how the tenant is using the premises or permitting their use. The IS recommends that the landlord obtains and retains written confirmation of the use from the tenant. It will be necessary, in future, for all leases to contain a requirement for the tenant to supply such information, so that the landlord can comply with the law.
Where premises are sub-let, the head landlord will not need to charge VAT (in the absence of an election) but the intermediate landlord may need to begin to charge VAT if the sub-tenant or a third party with the sub-tenant’s consent (not a separate sub-underlessee or sub-licensee) begins to use the premises for storage. "
High Street carnage
All this carnage on the High St must be causing problems for internet companies - where are people going to go in the future to look at stuff before they buy it?
'Readiness for Sale' - A Guide for Streamlining Commercial Property Transactions
“In 1995, a working party was set up by the Investment Property Forum (IPF) to consider existing procedures for the acquisition and disposal of real estate and to recommend improvements that would speed up the sale and purchase disposal process. The consultation led to the publication of ‘Readiness for Sale’ in 1996.
16 years on, property in the UK continues to represent, approximately 7%-8% of the total investment market (by value). Liquidity remains an issue exacerbated by the cost and time involved in undertaking transactions and it is clear that ensuring a property is ‘ready for sale’ is even more crucial in challenging economic times as prices are often renegotiated and funders become increasingly selective on assets and their sponsors. Against this background and the increasing use of technology and corporate wrappers, the IPF decided to review the 1996 publication and constituted a new Working Group in 2011. The second edition of 'Readiness for Sale' was published in May 2012. "
16 years on, property in the UK continues to represent, approximately 7%-8% of the total investment market (by value). Liquidity remains an issue exacerbated by the cost and time involved in undertaking transactions and it is clear that ensuring a property is ‘ready for sale’ is even more crucial in challenging economic times as prices are often renegotiated and funders become increasingly selective on assets and their sponsors. Against this background and the increasing use of technology and corporate wrappers, the IPF decided to review the 1996 publication and constituted a new Working Group in 2011. The second edition of 'Readiness for Sale' was published in May 2012. "