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LZ newsletter 015
Inexperience and business tenancies
Tackling a business tenancy matter is full of pitfalls for the unwary but not knowing that is one reason many landlords and tenants will have a go themselves. Another reason is a desire to save on costs. Costs mean the money has to come from somewhere!
In the relationship between landlord and tenant, discussion, also known as negotiation, involving a business tenancy ought to involve simply a literal observance and enforcement of the terms and conditions of the tenancy, but invariably extends to matters of opinion.
To the inexperienced it may seem weird for the parties to have gone to the time, effort and expense of having a lease drafted and approved by lawyers only for the wording of the completed document to be afterwards subject to matters of opinion. But that is a consequence of no standard form of business lease in use generally, combined with the art of drawing comparison which enables the experienced–eye to find fault.
Where inexperience can go wrong is in assuming the wording in the lease may be taken as read, a presumption in favour of reality, which in many instances might be so were it not for the possibility of case–law and/or any overriding legislation. When clashes arise, often they are fuelled by a conflict between a) what the actual landlord or actual tenant has in mind and b) what the lease actually says and business tenancy law and valuation permits.
That conflict may be summarised as the difference between the subjective and objective. The subjective is what the actual parties agree before entering into a binding contract, whereas the objective is what the actual parties would like to achieve after they’ve committed to the lease.
Theoretically, the objective should be shared as if a partnership, but often the interests of landlord and tenant are opposed. A difference in outlook that can be aggravated when either one or both parties are the successors to the original landlord/tenant and/or when the bank is breathing down the landlord’s neck and/or the tenant’s failings are blamed on the state of the economy.
Being a landlord is trying at the best of times. It is not unusual for what starts as a routine fairly straightforward matter to turn into a complex situation, whereupon it may become cheaper to pay an adviser to unravel and resolve the problem than for inexperience to pursue. The main reason for a change in direction during discussion and negotiation is that presented with a thorny issue and difference in opinion a little knowledge is a dangerous thing.
When it comes to information about business tenancies, the internet has a lot to answer for. When you are looking for guidance and free advice, there is an abundance of information, including contributors to on-line forums. But of the freely available information, most is either too general to be of much use, or too sophisticated to be easily understood by the inexperienced.
On forums or asking around, there is the issue of just how much detail an inexperienced person thinks important to mention and what a knowledgeable contributor or adviser needs. There is also the delicate matter of actual experience vs classroom text-book thinking. Business tenancy law and valuation is not a subject in which to to chip in with residential buy-to-let or emotive unfair contract consumer-oriented thinking.
Some problems may lend themselves to definitive solutions, but that presupposes all the facts are known, not just those the questioner would think relevant. Often, there is a vast difference between the academic and in practice. Firing off a warning letter may not have the desired effect. At rent review, the landlord’s intention to pressurise the tenant to concede agreement for fear of costs can back-fire.
Do–It–Yourself business tenancy management may be learned on the job but the art of DIY is not knowing what to do, but knowing what to do if something goes wrong. Generalising about business tenancy law and valuation is unlikely to apply to a particular situation because there is no standard form of business lease.
Each lease is different; in the drafting of documentation, words and phrasing are fashionable, and the use of precedents widespread and followed slavishly regardless. Amongst the ’small print’ is scope for different interpretations that can often result in substantial impact on investment performance.
In the prevailing market is a dash for yield. For successful investment, yield is often the least important, just one of many factors to take into account but, to the inexperienced, yield and immediate return on capital tend to be all that really matters.
Commercial property is an illiquid asset, not a safe-haven substitute for cash on deposit. The commercial property market attracts all sorts, inexperienced buyers are easy prey for shrewd sellers, inexperienced landlords and inexperienced surveyors soft touches for experienced tenants and cunning advisers. Business tenancy law and valuation is in a world of its own, another language. It is not always logical, things don’t automatically follow.
Generally, the higher the yield, the less chance of capital and/or rental growth, and the greater likelihood of problems arising. Before buying, questions include would you get your money back, and how are you going to make a profit?
As a landlord, to save costs and maintain yield, by all means manage the investment yourself and deal direct with the tenant but if you come unstuck then don’t expect advisers to welcome you with open arms. It is not only the market that is polarising between the successful and the rest but also experienced advisers are distancing themselves.
In the relationship between landlord and tenant, discussion, also known as negotiation, involving a business tenancy ought to involve simply a literal observance and enforcement of the terms and conditions of the tenancy, but invariably extends to matters of opinion.
To the inexperienced it may seem weird for the parties to have gone to the time, effort and expense of having a lease drafted and approved by lawyers only for the wording of the completed document to be afterwards subject to matters of opinion. But that is a consequence of no standard form of business lease in use generally, combined with the art of drawing comparison which enables the experienced–eye to find fault.
Where inexperience can go wrong is in assuming the wording in the lease may be taken as read, a presumption in favour of reality, which in many instances might be so were it not for the possibility of case–law and/or any overriding legislation. When clashes arise, often they are fuelled by a conflict between a) what the actual landlord or actual tenant has in mind and b) what the lease actually says and business tenancy law and valuation permits.
That conflict may be summarised as the difference between the subjective and objective. The subjective is what the actual parties agree before entering into a binding contract, whereas the objective is what the actual parties would like to achieve after they’ve committed to the lease.
Theoretically, the objective should be shared as if a partnership, but often the interests of landlord and tenant are opposed. A difference in outlook that can be aggravated when either one or both parties are the successors to the original landlord/tenant and/or when the bank is breathing down the landlord’s neck and/or the tenant’s failings are blamed on the state of the economy.
Being a landlord is trying at the best of times. It is not unusual for what starts as a routine fairly straightforward matter to turn into a complex situation, whereupon it may become cheaper to pay an adviser to unravel and resolve the problem than for inexperience to pursue. The main reason for a change in direction during discussion and negotiation is that presented with a thorny issue and difference in opinion a little knowledge is a dangerous thing.
When it comes to information about business tenancies, the internet has a lot to answer for. When you are looking for guidance and free advice, there is an abundance of information, including contributors to on-line forums. But of the freely available information, most is either too general to be of much use, or too sophisticated to be easily understood by the inexperienced.
On forums or asking around, there is the issue of just how much detail an inexperienced person thinks important to mention and what a knowledgeable contributor or adviser needs. There is also the delicate matter of actual experience vs classroom text-book thinking. Business tenancy law and valuation is not a subject in which to to chip in with residential buy-to-let or emotive unfair contract consumer-oriented thinking.
Some problems may lend themselves to definitive solutions, but that presupposes all the facts are known, not just those the questioner would think relevant. Often, there is a vast difference between the academic and in practice. Firing off a warning letter may not have the desired effect. At rent review, the landlord’s intention to pressurise the tenant to concede agreement for fear of costs can back-fire.
Do–It–Yourself business tenancy management may be learned on the job but the art of DIY is not knowing what to do, but knowing what to do if something goes wrong. Generalising about business tenancy law and valuation is unlikely to apply to a particular situation because there is no standard form of business lease.
Each lease is different; in the drafting of documentation, words and phrasing are fashionable, and the use of precedents widespread and followed slavishly regardless. Amongst the ’small print’ is scope for different interpretations that can often result in substantial impact on investment performance.
In the prevailing market is a dash for yield. For successful investment, yield is often the least important, just one of many factors to take into account but, to the inexperienced, yield and immediate return on capital tend to be all that really matters.
Commercial property is an illiquid asset, not a safe-haven substitute for cash on deposit. The commercial property market attracts all sorts, inexperienced buyers are easy prey for shrewd sellers, inexperienced landlords and inexperienced surveyors soft touches for experienced tenants and cunning advisers. Business tenancy law and valuation is in a world of its own, another language. It is not always logical, things don’t automatically follow.
Generally, the higher the yield, the less chance of capital and/or rental growth, and the greater likelihood of problems arising. Before buying, questions include would you get your money back, and how are you going to make a profit?
As a landlord, to save costs and maintain yield, by all means manage the investment yourself and deal direct with the tenant but if you come unstuck then don’t expect advisers to welcome you with open arms. It is not only the market that is polarising between the successful and the rest but also experienced advisers are distancing themselves.