Investment in Shop Property

1.0 - Property Market - Introduction

1.0.1 The property market, sometimes known as "real estate”, comprises the human-made surroundings that provide the setting for human activity, ranging from individual buildings, to villages, towns and cities with supporting infrastructure.

1.0.2 Property is product that is constructed of human-made and/or natural materials: for example, stone, clay, brick, slate, timber, steel, plastic, etc. Building construction disciplines include architecture, civil engineering, building contracting, surveying, energy performance advisers, interior designers and so on. For purpose of this website, the definition of property includes undeveloped land and parts of the building.

1.0.3 A property can last for years - built in the 1130s the Manor at Hemingford Grey is one of the oldest continuously inhabited houses in Britain and much of the original house remains intact; in Herefordshire, Hellens Manor was granted in 1096 and is a living monument to much of England's history - but whilst there are many ancient properties around the country still standing and in regular use, the notable building booms include the Tudor period (1485-1603) (on vast tracts of land following dissolution of the monasteries); Elizabethan (1533-1603) (early Renaissance); Georgian (1720-1840); Regency early-19th century; Victorian (1827-1901) with expansion brought about by the Industrial Revolution, railway network, trams; Edwardian (1901-1918), and particularly in Greater London and provincial cities, during the 1930s, 1950s, 1970s-2000s, and the present day.

1.0.4 The individual character and street-scape of cities, towns and villages is personified by the dominant architectural styles and age of their properties. There is also sometimes a marked difference between the public sector and private sector properties, particularly in residential property. During the 1920s and 1930s, the demolition of old 'slum' properties and the moving of tenants onto new Council estates led to the construction of large tower blocks of flats for social housing. The development and expansion of towns and cities is reflected in the story of shopping throughout the ages.

1.0.5 The main attraction of the UK property market, particularly for overseas investors, is its organisation, sophistication and transparency: the choice of property available, the supply of buyers and the legal and property valuation system; also the UK is well served by domestic and international banks, creating a competitive environment for funding.

1.0.6 Although many reputable organisations carry out research into the state of the property market at any time, in fact there is no single property market as such. Since property is an illiquid asset, the market value of each property depends upon much the actual buyer would pay and saleability upon finding one buyer to become the legal owner (albeit the actual buyer is not necessarily just one person or entity). So, when you invest in the property market, it is wrong to try to assess the direction of the market as a whole, there is no level playing-field: property is not homogeneous, everything that can be known about a particular property is not necessarily available, all buyers and sellers do not have complete information on the prices being asked and offered in other parts of the market, barriers to entry or leaving are restricted.

1.0.7 The property market is not a ‘perfect’ market, and that is just as well, because the purpose of a perfect market is not to make profits, but to efficiently allocate resources. In a perfect market, profit is a sign of inefficiency, whereas in an imperfect market, profit arises in direct proportion to the imperfections. In a perfect market, there is a large number of buyers, a large number of sellers, the quantity bought by any individual so small relative to the total quantity traded that individual trades leave the market unaffected; the product is homogeneous (the same property for all buyers and sellers), all buyers and sellers have complete information on the prices being asked and offered in other parts of the market; and there is perfect freedom of entry to and exit from the market.

1.0.8 Although property transactions are independent of one another, the legislation, rules, regulations and the interpretation of transactions between owners/vendors (sellers), purchasers (buyers), landlord and tenants, and mortgagees, comes under property law, an area of law that governs the various forms of ownership in real property (land and immoveable property).

1.1 - Real Estate

1.1.1 Property, in the context of buildings and land, is under the heading of 'real estate'. Real estate is a legal term that encompasses land, improvements to the land, such as buildings, fences, wells and other site improvements that are immovable and fixed in location.

1.1.2 The ownership of 'real property’ in England and Wales is enshrined in common law, equity and statute. As a monarchy, ownership is based upon hierarchy. The 'Crown' has the right and duty to determine the legal owner of the land, and the duty is administered by Her Majesty's Land Registry, a government agency whose task is to keep title records. Property transactions are almost always in writing and the title deeds (records) include information about the owner, charges, restrictive covenants, and so on.

1.1.3 The ultimate title is the freehold, which is ownership for an indefinite period of time. Below the freeholder is the leaseholder. Any number of leaseholders can be created but a leaseholder cannot grant an underlease for a longer period than the term of its own lease. 

1.1.4 There is no practical distinction between landlord, lessor and owner, assuming the owner is also the landlord, or between tenants, lessee and occupiers, assuming the tenant is not the owner-occupier: describing landlords as 'owners' and tenants as 'occupiers' reflects a desire to get away from feudalism. Similarly, it is open to discussion nowadays whether in the context of the landlord and tenant relationship a landlord ought to be considered the more dominant party, because many tenants regard landlords as suppliers.

1.1.5 The shop property market comprises freeholders and leaseholder owner-occupiers, landlords and 'tenants'. (I've put 'tenants' because here I am using the terminology loosely to include licences. There are important differences in law and practice between tenancies and licences.) Where there are intermediate interests between freeholder and occupational tenant, the in-between respective landlords would be defined as 'superior landlord' and landlord or lessor.

1.2 - Residential and Agricultural Property

1.2.1 The residential property market (houses, flats, and residential land) outweighs every other asset class in the UK, and is approximately eight times larger than the commercial property market.

1.2.2 I have been involved in the commercial property market since 1967. Although my father, a chartered surveyor, was a managing agent of numerous substantial portfolios of residential property belonging to well-known landlords, the concept of buying empty residential property just to let is alien to me. Once upon a time, residential property investment comprised houses, maisonettes, and flats let on controlled and regulated tenancies that could be bought at a discount to vacant possession value. In the early days, vacant possession hardly ever figured; often the capital value of the investment was a multiplier of rent net (after allowing for repair and management costs) and where either the rent was increased every few years via the Rent Officer and/or carrying out improvements, or vacant possession was ‘obtained’, either by the tenant going of their own accord or paid to leave, and thereafter the property sold with vacant possession.

1.2.3 My on-going experience of residential property is in the potential for redevelopment and/or capital and rental gain that can be obtained from residential accommodation attached to a shop; a shop and upper part. Generally, (subject to the terms of the business tenancy) the rental value of residential property that forms part of premises let on a business tenancy is usually calculated by estimating the gross rent of the accommodation if let on an assured shorthold tenancy and allowing a discount to take account of voids, management, etc.

1.2.4 Over the years, the break-up of parades of shops with flats above previously under single ownership has led to a separation of shop and residential. It has long been a moot point whether an investor would prefer to own the (freehold of) the whole building let on one tenancy, or be content with the shop alone, the residential part sold off on a long lease at a ground rent.

1.2.5 Whilst there is scope for capital and rental gain through the extension of what is known as “long leases” depends upon sophistication of the parties, and any marriage value - the difference between the value of the property on its shorter (possibly unmortgageable) term and the value of a longer (mortgageable) term - the potential in ground rent investment requires a ‘clean’ lease: residual responsibilities that fall upon the freeholder can wipe out the advantages. As for service charges, residential property is subject to consumer-oriented legislation, requiring compliance with procedure. Obviously there is scope for profit otherwise the shrewd landlords would have sold out long ago, but you have to know what you are doing.

1.2.6 Agricultural property is in a field of its own - excuse the pun! The Agricultural Holding Act describes agriculture as including horticulture, fruit growing, seed growing, dairy farming and livestock breeding and keeping, the use of land as grazing land, meadow land, osier land, market gardens and nursery grounds, and the use of land for woodlands where that use is ancillary to the farming of land for other agricultural purposes. Open-farming activities, which the public are permitted to visit, have been held to be a nonagricultural use of land (albeit in the context of a tenancy requiring "agricultural use only" rather than the more permissive use "in substance" for agriculture of the 1986 Act).

1.3 - Commercial Property

1.3.1 The economy is the wealth and resources of a country or region, normally in terms of the production and consumption of goods and services. In England and Wales, the commercial property market is a major sector of the economy and provides the physical accommodation for almost all industries, places of work, shopping and leisure. As an asset class, the ownership of commercial property is a significant investment for the pensions industry.

1.3.2 In common with residential property, commercial property is transparent, with an established legal framework and recognised valuation system. However, unlike residential property, the commercial property market is largely unregulated. Commercial property is predominantly a business-to-business market, where the legal relationship between landlord and tenant is based upon a commercial contract, (popularly known as a 'lease'). With a commercial contract the parties are deemed to know what they are doing.

1.3.3 The commercial property market is largely self-regulating. The majority of advisers are qualified, answerable to professional organisations and codes of conduct. A Code for Leasing Business Premises has been drawn up and which although voluntary (if only through fear of political intervention) is generally adopted by major landlords. Occupiers too have various representative bodies such as the Property Managers Association and the British Retail Consortium. And, although the value of the commercial property market has been estimated at £700Bn, of which approximately half is owned by occupiers and the remainder by investors/landlords, the number of different advisers and active participants in the market is relatively small so that in itself serves to keep things in order.

1.3.4 Unlike residential property, where transactional attitudes revolve around personal life-style and aspiration, in the commercial property market the relationship between occupiers (including tenants) and property is inextricably linked to marketing. Whether owner-occupier or tenant, the property is intended to complement the corporate image of the business of occupier or tenant at the date of the commitment.

1.3.5 A corporate image is the public face of a business: often the generally accepted image of what the company stands for, it is a form of promotion to suggest a mental image to the customer; and generally where a company is concerned about image, the company will often spend a considerable amount of money and time to ensure the overall standard of presentation. [A corporate image is not just tangible, it also includes intangibles: for example, how it treats employees, customers, suppliers and advisers, and anyone connected with the business, including landlords. For many businesses, the required property will include a style of architecture, layout and design; and for retailers, a feature of the retail sector is the trading position, including the impact of any changes in the locality on the tradition position.]

1.3.6 Commercial property continues to evolve. Unlike residential property where architectural styles and fashions of the time can come under the heading of 'heritage' to be preserved at all cost, and as listed buildings, commercial properties that have reached the end of their useful life or where the size, layout and configuration is obsolete are more likely to be refurbished or demolished and redeveloped, unless of historic importance. Even then, it is possible the external facade would be preserved, whilst all the innards stripped out and rebuilt to modern standards. Consequently, the age and construction of the property might not considered that significant between landlord and tenant because any onerous obligations for repair, maintenance and decoration could be circumvented by the provisions of a tenancy.

1.3.7 The commercial property market encompasses all property that is used or could be used for a business purpose. The business does not have to have a profit motive, but a fine-line exists between a hobby and a business. In the Landlord and Tenant Act 1954 Part II, one of the statutes governing tenanted commercial property, the definition of “business” includes a trade, profession or employment and any activity carried on by a body of persons corporate or unincorporate. That definition has been held to cover a sports club, but not to extend to a Sunday school as a spare time activity in the tenant's home, and taking in a few lodgers has been held to be outside the definition. Also, the premises need not be the place where the business is carried on. Although commercial property excludes residential property in itself, it is by no means unusual residential property to form part of commercial premises and so be subject to the law relating to commercial property and business tenancies.

1.3.8 The commercial property market is everything that is not residential or agricultural. Retail or shop property is a sector of the commercial property market and all buildings that are used or could, with planning permission, be used for any type of retailing including retail warehouses, retail showrooms, restaurants and financial and professional services and that fall into Class A of the Town and Country Planning (Use Classes) Order 1987 (as amended) are in the category of shop property.

1.4 - Stocks & Shares

1.4.1 Investing directly requires skills that may not be available to the investor: it also requires the availability of the desired proposition. Buying shares in a property company whose property investment and/or property development strategy is often a better bet both in the short and/or long term because the company is often better placed to procure the properties in the first place, and may already own them.

1.4.2 Whether best to invest directly or indirectly by buying shares in a property company is an interesting question.

1.4.3 Property companies whose shares are quoted on a stock market are basically companies that have floated on the stock market in order to raise money to buy the sort of property the directors have their sights on, in exchange for cheap money in the form of shares in the company.

1.4.4 It is cheap money because there is no obligation to pay a dividend, although many companies do and for as long as they can afford to.

1.4.5 Basically, when you buy shares in a quoted property company, you are paying others to buy and manage property that you might not have bought or couldn’t afford, in return for which you might get a dividend and capital growth.

1.4.6 Stock-picking - which companies to invest in - includes an ability to read company accounts. For property companies, the bottom-line is tangible net asset value (“NAV”) so for that it is also necessary to appraise the valuation and assess the valuer. Never be scared to think valuations might be dubious. Many valuers are more conservative or optimistic than others, the calibre of the portfolio can make a difference to saleability at any point in time. Also, watch out for the ‘collection’ value where a premium value has been attributed to the NAV for the opportunity to acquire a collection of properties in one place.

1.4.7 Remember NAV is the total net asset value of the portfolio as a whole. If the ‘rubbish’ outnumbers the ‘gems’ then that could depress the overall NAV.

1.4.8 With smaller quoted property companies, beware those where the directors have a controlling interest. If they decide to take the company private, their offer might be a lot lower than how much outside shareholders would expect. Also, beware of smaller companies where the directors’ salaries, options and compensatory package is disproportionate. How much a director of a quoted property company should be paid when often the bulk of the work is done by others to whom fees and commissions might also be paid begs the question “what is the director doing for the money?”

1.4.9 Generally, shares in quoted property companies are priced at a discount to NAV. Occasionally the share price is at a premium to NAV and that can happen when the prospects for growth are not reflected in the NAV, maybe comparable transactions at the NAV valuation date would if the valuation were carried out at a later date result in a higher NAV, or maybe there is talk of bid for the company whereby the opportunity to acquire a portfolio is the attraction. In my opinion, quoted property companies whose share prices are at a premium to the last reported NAV (assuming the date of NAV is recent) come under my heading of “high risk” because there is no telling whether the higher share price is in sync with valuation reality or Stock Market investor sentiment.

1.4.10 Where the share price is substantially below the last reported NAV, reasons include controlling interest in the company by director(s), low-grade assets, and so on. I do not think there is a rule-of-thumb as to what would be reasonably considered a safe discount to buy at, because the attitude towards safety varies. Sometimes investor quest is yield, other times capital growth, and others times a bit of both. The challenge is to estimate whether the share prices of many quoted property companies are too high, too low, or about right. Personally, I think the only way to answer that is to ignore commentators and evaluate the NAV yourself: that can be done by appraising the assets in the company's portfolio (information probably in the accounts on the website) and considering whether you'd buy them, or not.

1.4.11 Personally, for companies whose assets come under the heading of “run of the mill” and perhaps yield around 8.5-12% I should want share price about 50-60% NAV (net asset value). For companies whose assets are undoubtedly prime, important, and would surely attract considerable if interest if offered for sale in the market whether individually or as portfolio then I should want share price around 10-25% NAV. For companies whose share price exceeds the last reported NAV for no reason other than “collection value” I avoid. “Collection value” is a way of inflating share price to a level that effectively can make the company bid-proof and help safeguard the directors and managers’ careers.

1.4.12 Beware companies whose directors are prone to justifying holdings or recent purchases by reference to what it would cost to build the property today. That a property has been bought for less than its replacement cost does not in itself make the purchase price cheap: the point is that if it would cost less to build than its market value it would make no sense to build it! There are hundreds if not thousands of properties that have outlived their shelf-life and continue to exist for no reason other than not having been demolished or redeveloped.

1.4.13 Real Estate Investment Trust (“REIT”) originated in the 1880s and a time when investors could avoid ‘double tax’ or a tax at corporate and individual level. In the 1930s, the tax benefit was removed causing investors to pay ‘double tax’. Nowadays, REIT is a tax designation for a corporate entity investing in retail estate. The purpose of the designation is to reduce or eliminate corporate income taxes. In return, REITs are required to distribute 90% of their taxable income to investors. REITs can be publicly or privately held; and public REITS may be listed on public stock exchanges.

1.4.14 In the UK, the rules for REITs were enacted in the Finance Act 2006 and REITS came into being in January 2007. I think the timing of the conversion date for becoming a REIT was politically motivated. There was considerable untaxed value in property assets and the Labour government was intent upon extracting potential tax. When REIT were first introduced into the UK, in my opinion the companies that converted overpaid because their assets were revalued and tax paid on the book value of the increase at that time, around the peak of the market. That the companies that rushed to convert saw no harm in destroying shareholder value struck me as curious because no one seem to mind.

1.4.15 Although REITs can be tax-efficient, because the property company pays no corporation or capital gains tax on the profits made from property investment, that presupposes there are profits made from the property investment activities. Where properties are held for development, the investment potential may take years to come to fruition.

1.4.16 I am sceptical whether REITS are run for shareholders, so much as for their directors and managers! Of course, some professional advisers enthuse about REITS - for example, there are currently 22 REITS owning approximately £40Bn of property, approximately 80% of all property held by UK companies - presumably (dare I say it) because they are on the receiving end of lucrative fees, or regards REITS as the vehicle for new types of investment (in other words, selling from the outside in). As for yield on shares, the same appraisal criteria is necessary; for example: is the prevailing share price a good value reflection of the net asset value, how reliable in the NAV, how sustainable long-term is the dividend and whether there that much scope for increase?

1.4.16.1 For more information about REIT, the British Property Federation has a website.

1.4.17 Many quoted property companies are better at property than company management. Consider, for example, Land Securities plc: its portfolio is undoubtedly prime and its people adept at realising potential, but in my opinion how it manages the company for shareholders leaves a lot to be desired, such as embarking upon a share buy-back programme costing about £570 million in 2000 and more buy-back again in 2007 when the share price was around £17.20 (today it’s about £10.20, and at 30 September 2013 adjusted NAV £9.37), and converting to a REIT at the height of the market thereby paying tax on peak prices. Had that money not been wasted, Land Securities might not have needed a deep-discount rights issue (eight shares for five at £2.70) to raise £755M in 2009, and to reset the dividend.

1.4.18 Unlike investing on the Stock Market where investors own a share of the company, the performance of which is largely in the hands of the directors and their choice of managers and/or advisers, a property is what a company or person leases for its business purposes.

1.4.19 The main attraction of property is that the payer of the investor’s return on capital - the tenant - is under a legally-binding contract to pay, whether or not the tenant’s business is profitable. Furthermore, a feature of business tenancies in England and Wales is the “upward-only” rent review: although that does not mean the rent must go up at review, it does mean the rent payable cannot go down. Although upward-only review can cause problems for tenants, and there is talk of legislation, reviews are for the most part still upward-only, or on terms that compensate the landlord for the loss of certainty.

1.4.20 In the shop property market, each property is unique, so part of the market value will depend upon the attitude of investors for the type of investment at the time the proposition is for sale. Property transactions are one-to-one. Although interest rates play a part, for rent to have to cover interest on borrowing is not as important as the other determining factors: whether rent is likely to increase, scope for capital growth or angles to improve value.

1.4.21 The other part of the market value is the effect on rent of the business plan of the tenant in occupation. Although in business tenancy law, and subject to the guidelines for rent review in the actual lease, any effect on rent of the tenant’s occupation of the premises or any goodwill attaching to the premises by reason of the tenant’s occupation is usually ignored, neither of those ‘disregards’ applies to the capital value of the property. Consequently whether the tenant can afford the shop and whether that affordability is enduring so much so that on expiry of the tenancy the tenant would want to renew and for a long period of time are factors that can make an appreciable difference to the value of the investment. Where many investors go wrong is in assuming the tenant is bound to want to continue in occupation and/or renew.

2.0 - Shop Investment

2.0.1 Investment in shop property can be very rewarding, or it can become an expensive mistake.

2.0.2 An investment medium, commercial property is not without risk, and whilst the risk, of which there are many, might seem more apparent compared with, for example, offices, factories and warehouses, where building obsolescence is an important factor, the snag with shop property is that the role of shops is inextricably bound up with marketing and the operational logistics of the tenant’s business.

2.0.3 To an extent, the secret of successful investment in shop property is about judicious choice. Having the good sense to avoid certain types of propositions no matter how tempting is not only a matter of judgement, but also objective forward-thinking.

2.0.4 When you buy a shop property with vacant possession with a view to letting the premises, the terms and conditions of the tenancy are a matter of agreement between you and the tenant. An investment in shop property hinges upon the terms and conditions of the tenancy, and any related documentation. Since there is no standard form of business lease generally, the wording of those terms and conditions requires careful thought, because the practical consequences of the connotations (both positive and negative) that a single word or phrase can attract can affect not only the management and operation of the tenancy but also the relationship between landlord and tenant, and ultimately the performance of the investment.

2.0.5 When you buy a shop property that is already let on lease, the terms and conditions of the existing tenancy, together with any related documents, can affect the management and performance of the investment. Those terms and conditions would have been agreed by a different landlord and possibly a different tenant (when the tenancy has been assigned) and since the wording and phrasing cannot be changed except by mutual agreement there is no certainty that whatever was agreed by the previous parties would be acceptable to the market at the time of your involvement and expectations for performance of the investment.


2.0.6 Amongst the points to remember, these three should be at the forefront of every investor’s mind:

1) the landlord owns the property, not the tenant’s business;

2) 'upward-only' rent review doesn't mean the rent has to go up;

3) a difference can exist between the value of the property and the value of the investment.

2.1 - Retail Property

2.1.1 Investment in shop property is, for many people, closest to home. Not literally, necessarily, but because shop property is only one step removed from residential property. Since everyone goes shopping - albeit not everyone likes shopping! - shops are more easily associated with than, for example, offices, factories and warehouses where occupiers may be relatively anonymous.

2.1.2 The market for shop property comprises investors (landlords), developers and occupiers.

2.1.3 Unlike investors and occupiers, developers look at the potential for an existing property: they imagine what the property could become. That potential might not be the property on its own, but in conjunction with an adjoining building or neighbouring properties. Assembling a site from a number of different properties can result in a large development, whose end-value far exceeds the existing use value of the individual properties.

2.1.4 Investors tend not to think like that, but they should. Investment is about considering all the angles, one of which is whether the property has development potential.

2.1.5 Development potential is not limited to demolishing the building and starting from scratch. It includes conversion, refurbishment, updating, improving and modernising the layout and configuration. It includes possibility for enhancing value by getting planning permission for change of use. For examples: a shop with a residential flat above where the flat could be converted into 2 or more flats; the shop combined with the shop next door to form a double unit for which there could be more demand, or demand from a different type of user and for which a higher rent pro-rata could be obtained; or a single-storey lock-up shop where it would be possible to construct another floor or more above. Even if you don't have the money to do the work yourself, that doesn't mean the development potential should be ignored.

2.1.6 The market comprises buyers and sellers. Property advice is the realm of the surveyor, assisted where necessary by lawyers. Surveying has been an essential element in the development of the human environment since the beginning of recorded history, approximately 5,000 years ago. Surveying is required in the planning and execution of nearly every form of construction, including transport, communications, mapping, and the definition of legal boundaries for land ownership.

2.1,7 With property transactions, although surveyors do not make the market, it is the surveyor's interpretation of the behaviour and attitude of buyers and sellers that will often have a profound influence upon the state and direction of the market. The reason surveyors have so much influence is that, unlike the seller’s or buyer’s opinion of value that is likely to be subjective, the surveyor's opinion is objective. With 'subjective' the person will assess the proposition in relation to that person’s individual requirements, whereas with 'objective' the surveyor will assess the proposition in relation to the market.

2.1.8 When investors are left to decide or fend for themselves, there is the risk that their assessment of the property's suitability as an investment is likely to include a host of subjective factors, ranging from personal requirements to observations on the market including media reports and commentary. Although observation and research have their uses, it is not until you know what is really happening behind-the-scenes that you can draw a reliable and balanced conclusion. Anything else is conjecture and speculation. In my experience, the main reason many investors come unstuck is in failing to take account of the truth of the market. 

2.1.9 Although the retail sector is approximately 8% of gross domestic product (GDP), the truth of the market is a reflection of the retailer business plan. A business plan is a set of parameters based on the cost and expectations for achieving a goal or objective. Essentially, a business plan will include a marketing plan, although the documentation may be separate. Basically, it is all about how to go about achieving what the retailer wants; and because how the retailer does that will often differ from how the property investor would do it if the investor were the retailer is why investors can go wrong.

2.2 - Entering a market

2.2.1 When entering a market, it is useful to consider with whom you are likely to be dealing and encountering.

2.2.2 Unlike residential property, where generally the market revolves amount local estate agents and a few national agencies, the commercial property market is small and the shop property market smaller. Not all agents/surveyors in commercial property deal with shops. Although local generalist estate agents/surveyors deal with shops, rarely are those shops in primary locations. Generally ‘High Street’ shops and buildings with retail use, such as supermarkets, retail warehouses, factory outlets and trade counters, are handled by city agencies and niche specialists. So a local surveyor may not have enough experience of acting for tenants or landlords outside the immediate locality to be able to appraise shop investments.

2.2.3 The tenant’s surveyor may not be based in the same area as the tenant. In fact, most larger retailers have in-house property departments and retailers often use surveyors based nowhere near the premises. It does not follow that because you might think it makes sense to instruct a surveyor local to the shop, the tenant would. On the contrary, an outsider will usually be able to approach the matter objectively and in fact many tenants dislike using a surveyor who is or might be pally with the landlord’s surveyor, because they feel they would not get a good deal.

2.2.4 Successful relationships with professional advisers are based upon the client’s trust in the adviser’s advice and the adviser’s opinion of the client. It can take time to develop rapport and, although one assumes investors are intelligent, an experienced surveyor may find that explaining the subtly of shop property investment to someone having little or no experience of business tenancies, let alone the principles of marketing, requires considerable patience. Shop property investment and business tenancy law is complex at the best of times, but inexperience can give rise to over-cautious and/or over-critical receptiveness, wrong questions asked for example, what of performance indices, returns available elsewhere and whether price is relative to the cost of borrowing. Often, difficulties can arise in communication not because there is anything wrong with the advice, but that the surveyor has not found a way to manage client expectations.

2.2.5 Consequently, unless you have a substantial amount to invest, with finance arranged, and are prepared to pay for and act on advice many experienced surveyors cannot be bothered with private investors. Because there is so much money about, long-standing clients with investment requirements take priority over newcomers. Consequently, relatively experienced private investors are likely to attend auctions where they can bid for whatever they like.

2.2.6 Most surveyors serve the property market, but the market is not inanimate, but comprises people. So another problem for surveyors is that unlike the Stock Market where an investor is buying a share of a company’s business, it is vital the investor emotionally accepts that usually, when buying a shop property investment, the investor is not buying into the tenant’s business, but the property in or from which the tenant-retailer trades. Rational acknowledgment is not enough. From experience acting for tenants at rent review, I find that landlords can tend to think that, when the tenant is doing well, the tenant should pay more. Although the same would apply in reverse, a landlord that does not want to try to increase the rent because the tenant is not doing well is making a judgement that is nothing to do with a review. What an investor must understand is that for credibility the surveyor’s approach to tenancy management must be objective. I am not suggesting surveyors know it all, but the point is that if the investor’s expectations are out of sync with reality then the surveyor’s job becomes impossible.

2.2.7 It is also important, with respect, to avoid micro-managing the adviser because that will stifle creativity. In my opinion, there is no point in a landlord instructing an experienced surveyor for the landlord to dictate to that surveyor how the surveyor should deal with the matter. Experienced surveyors, particularly, are not messengers, they are advisers and for a successful relationship to form it should also be allowed to blossom.

2.3 - Buying

2.3.0 A buying strategy is influenced by certain basic considerations:

2.3.1 The amount of available finance and/or borrowing (loan) facilities

2.3.1.1 A cash buyer is limited to the amount of cash available so the number of propositions that may be bought will vary depending upon the source of the cash and the price-range for the type of proposition required. The amount of cash available must allow for transaction costs (buying and selling), also management and holding expenses during the period of ownership. Not all costs are recoverable from the tenant; in any event, it is often necessary to lay out costs and expenses in advance before they are reimbursed or paid by the tenant.

2.3.1.2 Borrowing facilities will either be proposition-specific or general facilities, using revolving lines of credit. When buying depends on whether the proposition would fulfil mortgagee criteria, the buyer’s flexibility both for price and type of proposition is likely to be limited. Also, mortgage criteria can change so the sort of proposition that lenders will finance will vary. Generally, it is better to arrange funding that is not proposition-specific, because that would lead to a wider range of opportunities. It can also avoid over-paying because often the sort of proposition that is mortgageable may not result in a successful investment.

2.3.2. Familiarity with and accessibility to the geographical area

2.3.2.1 The proposition should be capable of looking after itself, or at least justify management time. The property should be in an accessible location and in an area where you would feel relaxed if you had to visit the tenant to collect the rent personally. There is no point in buying an investment in some obscure place that hardly anyone has heard of because the number of potential investors will diminish. Up-and-coming locations will often have potential but how long it might take for that potential to materialise ought not be underestimated.

2.3.3. Familiarity with the type of investment

2.3.3.1 You should be able to understand the type of investment you are buying. Most investors choose freeholds, but the yield is usually lower for freehold than with short-term or medium-term or long-term leaseholds.

2.3.3.2 Because a difference exists between the value of the property and its value as an investment, there is no certainty, depending upon the price paid, that merely because the property is freehold it would necessarily hold or maintain its (investment) value. Furthermore, for reasons I shall explain, all property is a depreciating asset.

2.3.3.3 A leasehold investment is a depreciating asset so, as the term shortens, the yield increases. That can affect resale, particularly if the occupational rent has not gone up by enough to offset the reduction in capital value. When you buy a leasehold, it is wise, at some stage, to buy in the freehold, if possible, regardless of its technical value (assuming sensible price), because freehold propositions are more popular. With leasehold investments, you may have to provide financial references to show you can support the (ground) rent. The ability to pay the (ground) rent is based upon the investor's personal status, and not upon the profit rent. (Profit rent is the difference between the rent the investor pays the freeholder(superior landlord) and the rent received from underletting the premises.)

2.3.3.4 On expiry of the contractual term a proposition is said to “revert”. Ownership of the reversion depends upon the interest of the superior landlord. In property law, a leaseholder cannot underlet premises for a period exceeding the duration of the term of that leaseholder’s interest. For example, where the superior landlord is the freeholder and has let the property for 99 years at £100 a year to A, and A underlets to B at £25,000 a year, then on expiry of 99 years (assuming all other factors remaining constant) A’s interest in the property as intermediate landlord would end and the freeholder then would become B’s direct landlord. Assuming the lease between the freeholder and A permits assignment, A’s leasehold may have a value that could be sold to another party and that could happen ad infinitum. The freeholder’s interest is subject to the remaining or unexpired term of years to A, and what is known as a short-dated, or medium-dated, or long-dated reversion depends upon how many years are remaining before expiry of A’s lease. The value of a reversion depends not only upon the profit rent but also the demand for the type of proposition. An attraction of medium-long-dated reversions is reasonable certainty of capital growth (assuming all other factors remaining constant) and for investors that do not require income in the short term such propositions are in short supply so the purchase price may be relatively expensive. (In the latter part of the 19th century, many properties were sold on ground leases for 99 years and often at fixed rents: 1998 was the last year for such propositions.)

2.3.3.5 Medium-long dated reversions, often known as freehold ground rents, are a specialist market. The risk is that a lot can happen between the date of purchase and the reversion and that can affect the profit-potential depending on the purchase price. In the early 1980s, I remember talking with an investor at an auction delighted to have paid £160,000 for £250 a year, reversion in 2004, estimated rental value £25,000 a year. By chance whilst I was inspecting shop premises in the same street in 2005, I saw that the investor’s property was empty and like other shops nearby emblazoned with agents’ ‘to let’ boards at an asking rent of £15,000 a year. Conversely, capital growth can be fabulous. In the late 1980s, for a client, I acquired two long-dated reversions in a popular West London suburb producing £20 a year for the total sum of £30,000. Today, the properties produce approximately £70,000 a year, and the value of the residential accommodation could be enhanced by redevelopment.

2.3.3.6 Most investors prefer either rack-rented propositions - rack rent is terminology for market rent - or early rent reviews and reversions so that they can improve the rent and/or capital value within their foreseeable future.

2.3.4 Management administration

2.3.4.1 Competent management is essential. Management means administration so if you do not like writing letters or dealing with tenant(s), or don’t really understand what you are doing, do use commercial property managing agents - not residential agents - or instruct an experienced retail property surveyor to assist you. Little things crop up all the time with shop property ownership, ranging from the administration of building insurance to the approval of tenant's requests. A competent managing agent or surveyor should monitor the growth and performance of your asset. Also, a managing agent or surveyor provides a ‘shield’ between landlord and tenant.

2.3.5. Yield

2.3.5.1 Never buy a proposition on yield alone. Yield is more than just the return on your investment: it is also a measure of prospects. Few private investors cost the loss of interest on their own money (equity) and propositions are not always self-funding, so loss of interest must be balanced by the knowledge the investment is an appreciating asset, both income and capital value. Neither rent nor capital growth has to keep pace with inflation and whilst property has a reputation as a long-term hedge against inflation, that does not necessarily apply to all property in all locations.

2.3.6. Dealer/trader or Investor

2.3.6.1 It is said that an investment is a deal that went wrong. The main difference between dealers and investors is that dealers are more interested in turning a profit sooner than later. However, the price a dealer would pay ought not be any different to the price an investor should pay. Just because you might not want to sell the investment as soon as there is a profit to be had does not mean you may overpay to start with. Arguably, exactly the same criteria should be used when appraising the proposition: the only difference is the timing of a re-sale.

2.3.7. Property knowledge and know-how

2.3.7.1 Although property knowledge can be learned, know-how comes from experience. Often, there is a big difference between what should happen and what happens in practice. When you read a lease, for example, the literal meaning of the words and phrases may be different from how those words and phrases apply in practice. Lawyers do their best to put in writing the intention of the parties, but wording and phrasing varies and there is no standard form of lease or set-wording, so no matter what the document says, what you’ve got might not be what you get.

2.3.7.2 The administration and interpretation of a business tenancy is based on a combination of legislation, business tenancy case-law and rental valuation practice. Some legislation overrides the wording in the documents - for example, any agreement requiring one party to pay the costs in connection with arbitration at rent review is void under the Arbitration Act 1996. Case-law can set a precedent, so merely because nothing was done about the rent review at the time may not mean the landlord has lost the right to do so years later.

2.3.7.3 Amongst the most common mistakes, in my experience, that landlords are prone to making is a tendency to word notices using their own wording and phrasing, rather than by reference to the documentation. It’s not only landlords: many surveyors ignore the wording and phrasing in the document and instead do their own thing. In a matter I dealt with recently, the landlord instructed a surveyor to handle the rent review whereupon the surveyor served notice without regard to the wording in the document and consequently the landlord lost the right to review the rent.

2.3.7.4 In outline, the application of business tenancy law and rental valuation can affect both the rent and capital value of an investment. Until recently, it might be thought no real difference, apart from procedure, between negotiation at rent review and lease expiry/renewal, but nowadays the practical differences are numerous. For example, at rent review, the tenant usually has no choice but to pay the same rent as before if the market rent were no greater, whereas on expiry the tenant can quit the premises and leave the landlord with the risk and cost of reletting or otherwise disposing of the premises, or pay a lower rent than might have been passing previously. Where the investment is on mortgage, the outcome of negotiations might also affect the loan requirements and lead to the bank wanting its money back. The distressed loans that banks are nursing are a consequence of the period 2004-2008 when investment was primarily based on yield compression, rather than property fundamentals.

2.4 - Selling

(Content awaited)

2.5 - Auction

(Content awaited)

2.6 - Growth

2.6.1 The rate of growth is a combination of rental and capital growth.  Although capital growth is often rental-dependent, a higher price may be obtainable from an owner-occupier rather than an investor or developer. Also, because a difference can exist between the value of a property and a proposition, investment sentiment can affect growth.

2.6.2 A recent sentiment, that came into being in 1999 or thereabouts, is "yield compression" - essentially a gamble on mortgage interest rates. For example, a shop investment let at £20,000 a year and priced at £200,000 (yield 10%) when mortgage interest is 5% might be thought a bargain, so the price goes up to reflect the difference between the return and cost of borrowing. Nowadays, we have what I call 'confidence compression'  where buyers are banking on capital growth as the gap narrows between the cost of borrowing and the investment yield. 

2.6.3 Capital value is calculated by multiplying the estimated rental value ("ERV") by the yield (or year's purchase) that the market would require at the date of valuation. Note I say estimated’, not actual. A shop let at £20,000 a year in 2005 might not fetch £20,000 a year in 2010 if offered to let on the same terms and conditions in the lease as in 2005. The estimated rent might be more, or less. 

2.6.4 Yield is the actual rental expressed as a percentage of the capital value. Year's purchase (“YP”) is the yield expressed as an integer. For examples, an investment priced at £300,000 the rent at £15,000 would yield 5%. The year's purchase is 100/5 = 20 YP. In my opinion, use of YP enables a more readily identifiable indication of investment prospects because it tells you how many years are needed for that amount of rent to recoup the purchase price.

2.6.5 Rental growth reflects one or two factors, or a combination of both: 1) demand and supply of the sort of shops that suit the prevailing requirements of tenants that are in the market for premises; and 2) whether, in comparison with other premises and their tenancies, there is 'something' in the wording of the tenancy that would justify a greater rent.

2.6.6 Although a shop property that is let is an investment, not all shop investments perform, or are capable of performing. For example, there may be no likelihood of the rent increasing, or no likelihood someone else would pay more than you, so you might not get your money back and depending upon the market when you want to sell you might not be able to attract a buyer. Also, a great many shop investments with no chance whatsoever of performing are created by cunning sellers to attract naive buyers into paying far more than the property would be valued at.

2.6.7 Many investors become successful, despite mistakes. Often, achievements outweigh the cost of mistakes, but all that means is that they have benefitted from market momentum. When the market changes, as it does and sometimes suddenly, negative events can overtake achievements. With shop property, one worst thing that could happen is that the property becomes vacant and unlettable at a rent that would give you a proper return on the investment; and whilst you are hoping to attract a tenant, the building is deteriorating and empty property rates are draining your resources. The other thing is foreclosure and being made bankrupt. Of course, the worst may not happen: but what does happen more often than not is that the investment fails to perform: the rent never increases and the value falls.

2.7 - Marketing - Principles

2.7.1 Marketing is a function of business management: a means to an end. A generic term, embracing all forms of communication and promotion - for example, advertising, selling, direct mail, public relations - a market, together with the art and science of marketing, is anywhere business is done. An actual place - e.g., shop, auction room, car boot sale, via telephone, email, mail-order, TV, the Internet.

2.7.2 Marketing happens when we want to satisfy a need and are willing to exchange something with someone able to help us satisfy that need. The process exists to bring buyers and sellers into a market. In business, the transaction is reciprocal. Transaction is the carrying out or performance of an action. Transactions are usually for money, but may involve bartering goods and are conducted between sellers and buyers, or through agents, wholesalers, manufacturers, brokers, etc.

2.7.3 A market is a catalyst for connecting the subjective and the objective. A catalyst is something that remains inert or permanently unchanged during the process of increasing the rate of a reaction. Although people talk about a market changing, actually a market is 'inert' - a place where, or a means by which, people transact. It is not the market itself that changes, but the participants and attitudes. People come and go, everyone is different and different people have different ways about going about getting what they want.

2.7.4 A need is a state of 'felt deprivation' and arises through a lack of synchronicity in the relationship between one's physical, psychological and spiritual states, and the flow of energy for maintaining balance and harmony that enables us to function as human beings. In common parlance, a need arises whenever we should change but for whatever reason do not. Not changing when we should is a consequence of our ability to think "mind over matter": to carry on with whatever we are saying or doing regardless of how we might be feeling at the time: thinking mind over matter can lead to a disconnection from reality. Since change is a natural progression for maintaining balance and harmony in our relationship with ourselves and the outside world (reality), everyone has the same basic needs:

Physical and Physiological - for example: hunger, thirst, health, warmth, shelter
Safety and Security - for example: protection, belonging, social, affection
Individual - for example: knowledge, self-expression, recognition, status
Self-development - for example: self-actualisation, realisation, spirituality

2.7.5 People satisfy their needs through what they want, and to what they aspire. Wants are shaped by culture, individual personality, image and life-style. When we want to say or do something, we are aiming to satisfy a need of some sort. If a need is unsatisfied, then people will do one of two things:

i) look for an object or service that will satisfy it, or
ii) try to reduce the need

2.7.6 Whereas people have almost unlimited wants, they have limited resources, so they want products and services that provide the most satisfaction: value for money.

2.7.7 The total market is everyone who ever buys anything. A market sector is a segment of the total market. A monopoly serves the total market, but most businesses serve a market sector: individuals, or groups of people or other businesses, whose needs can be satisfied by their particular service(s). A target market is a specific group whom the business believes would benefit from the services and products. All markets are to a large extent specialised, so as to attract the sort of buyers and sellers for a particular category of product or service.

2.7.8 It is vital to appreciate that marketing is essentially about satisfying needs. The satisfaction of a need is a benefit. With a benefit, we gain or profit from the experience. Whereas, to a business, profit is about making more money than it costs the business to provide the product or service, to the recipient of the product or service profit is about overall satisfaction.

2.7.9 In practice, maintaining and reinforcing the connection offers three advantages: firstly, it engenders loyalty: the recipient is likely to use the same product or service and buy it from the same place as before; secondly, it is a measure of the success of the business's mode of business; and thirdly it enables the business to plan ahead with some certainty.

2.8 - Marketing Plan

2.8.1 For a retailer, a marketing plan is basically all about how to go about attracting enough customers of the type that the retailer wants to help.

2.8.2 Once upon a time, the hub of economic and community activity was the town centre. On one or more days each week throughout the year, townspeople and countryfolk would set up stalls and booths to ply wares and exchange goods and services. Whether the exchange was in currency (money) or bartering, the principle was the same: people helping one another. To help and be helped is a natural human instinct and the degrees of help and the form the help takes are provided either directly or indirectly through products, goods and services.

2.8.3 The function of help is to satisfy a need. A need is a state of ‘felt deprivation’ and everyone has the same basic needs. I find a good way to understand what a need is to liken a need to the adjustable feet on a set of weighing scales. For a scale to do its job properly, it must be in balance and harmony. So too must the human being: people function at their best when in a state of balance and harmony. Whether the ground underneath is uneven or the scales themselves wonky, the first thing to do is to adjust the feet of the scales to make sure the relationship between the machine and whatever the machine is on is in sync. Maintaining a harmonious relationship keeps things in balance.

2.8.4 When, for whatever reason, a need is unsatisfied it will look for ways to be fulfilled. A need can become unsatisfied when we are supposed to change but for some reason do not. Change is not something we can resist indefinitely. Resistance to change leads to change being forced upon us whether we like it or not. Essentially, change is about progress, about experience with a view to developing understanding.

2.8.5 Although everyone has the same basic needs - for example, hunger, thirst, physical safety and security, individual self=development and spirituality - only each individual will know that they need at any one time so finding ways to satisfy your particular needs is what motivates you. We give priority to important needs. Once our most important or pressing needs are satisfied or generally taken care of, we set out to satisfy the least important.

2.8.6 We form relationships to help one another and be helped, in some way and at some level. The duration of a relationship depends upon the purpose of the relationship. With personal relationships where the bond that keeps the relationship together is intangible or emotional, such as friendship, companionship and love, the value of that bond may be free or priceless, but when the bond is tangible and the purpose of the relationship involves the exchange of money, it is known as ‘business’. In essence, business is the art and science of helping people their individual needs in exchange for money.

2.8.7 Business is about transaction and the ‘place’ (which need not be a physical place) where business is transacted is known as a market.

2.8.8 The development of towns is either organic or planned. An organic town is a place that evolves and grows up around the geography of the locality, such as by a river or a valley in the landscape. A planned town is where someone, often the church or royalty, started with a metaphorical blank sheet of paper, or a field, and designated spaces for others to put up buildings, and so on.

2.8.9 Once upon a time, (circa 11th/12th centuries) the idea for a planned town was to create a market: a focussed or central place for transaction between buyers and sellers of products and services. In those days, creating a town from scratch was an early form of business plan. From the original plan came the development of shops. Unlike stalls that would be dismantled at the end of each day, shops are permanent structures that can be open every day and in all weathers. In bygone times, when travelling any distance was fraught, for there to be a variety of shops in one place was an attraction. Over the centuries, the idea for the market place developed and expanded until a by-product of the business plan saw the emergence of a resident and catchment population, local inhabitants, factories and commerce, and everything else that latched onto the original plan. In more recent times, in the 19th/20th centuries, planned towns were designed to accommodate the latching on.

2.8.10 The origins of a town and its development depend upon history and heritage. In market towns, where the buying and selling of livestock and produce took place, originally, stalls would have been erected for the day and taken down at the end of each day, but gradually they became permanent structures, firstly booths and then a row of buildings, often down the middle of streets. Market encroachment is a feature of many market towns and in many places the whole of the built-up area began as market encroachment. By the end of the 1300s, official terminology had caught up with the change and the permanent structures were called shops. Basically, a shop is a place in or from which a shopkeeper can do business. Shops were the successor to the temporary and moveable structures of stalls and booths and in being permanent and under cover had the advantage of being open all day and in all weather.

2.8.11 In 2014, the fundamental principle of the market place has not altered, but the perception of the role of the market place has changed. It was never intended for the market place to become a community for the public generally: essentially, the market place was purely for doing business: any spin-off ideas purely and simply there for the ride. To cut a story, there is less need nowadays for shops to be in a market place, moreover no need for the place of the market to be physical: instead shops can be and are dotted all around, in and out of town; and a multitude (the new ‘corner shops’) are invisible having only a website presence. The business plan has become more flexible in order to provide different channels of communication between shops and customers.
With so much economic activity, wealth and social-wellbeing attached to the role of community, naturally community and political leaders are concerned to ensure the survival and prosperity of the underlying business plan, but the difference between those that latch on and those that make the running is that business cannot afford to stand still. For the business, the challenge is two-fold: how to attract profitable customers (people that don't just want bargains or only what's cheap, but will pay full price) and where best to do so. For many retailers, a great many more places are no longer good for business. There are many reasons why the problem has manifested, not least the increased mobility of the population, competition from retailers in neighbouring towns and cities, and the emergence of internet shopping and e-commerce. So the difficulty for the community in the locality that has latched onto to a particular town is that having maybe invested a deal of time and effort in becoming part of the community, there is no way it is going to be able to let go (willingly) merely because the retailer business plan upon which the town was founded wants to move on. Instead, the Government, with the help of Mary Portas, is intent upon ensuring the business plan stays put.

2.8.12 For town planning based upon local community requirements the challenge is how to manage community expectations and the reality for the retailer. It is fair to say that someone with no experience whatsoever of what’s like to run a shop, let alone serve customers, is likely to have a different view of what happens behind-the-scenes in a retail business. Understanding the link between price, turnover and profit can be elusive! For example, where tourists are attracted to heritage, the community plan might want to capitalise of the history by doing whatever it takes to preserve the town as if a museum. Unless the tourist footfall is all-year-round, rather than seasonal, the plan might succeed provided there is no interruption to the supply of tourists spending money. With a seasonal tourist industry, the town’s retailers are likely to survive on/live off local residents and the catchment population. The money has to come from somewhere in order to support the community ideal. Arguably, it should be a condition of any town plan that more than enough members of the community would commit to put their money where their mouths are, but since where, when and how people choose to shop is a matter of personal preference, with so many different forces at work, there is no way of knowing before implementing the plan whether the money would roll in. For a retailer, whether it’s worth giving the community the benefit of the doubt is a matter of that retailer’s personal opinion but if after a few months or maybe a year if possible to last that long, not much has changed then the business plan should be to adopt a robust approach by going its own way for the benefit of customers, rather than stick around in the hope of wishful thinking.

2.8.13 Regardless of the social and community attractions of shops and shopping, retailing is not an extension of social services. Retailers make money from extracting profit out of the difference between the total cost to the retailer in buying the goods/services and the total cost of reselling the goods/services. The difference is known as the ‘profit margin’ and the margin will vary depending upon the retailer’s buying power, economy of scale and the volume of goods/services sold on a daily basis.

2.9 - Footfall

2.9.1 Regardless of the social and community attractions of shops and shopping, retailing is not an extension of social services.

2.9.2 Retailers are in business, and business is all about helping people in exchange for money. Retailers make money from extracting profit out of the difference between the total cost to the retailer in buying the goods/services and the total cost of reselling the goods/services. The difference is known as the ‘profit margin’ and the margin will vary depending upon the retailer’s operating costs and overheads, buying power, economy of scale, rate of stock-turn, cash-flow management, and the turnover of goods/services.

2.9.3 Footfall is pedestrian flow, the number of people that walk past the shop on a regular basis. In my opinion, there are two types of footfall: the first stems from fixed attractions, the second from what I describe as ‘magnetic’ retailers, more popularly known as ‘destination’ retailers, (albeit destination retailers are not quite the same).

2.9.4 A fixed attraction is anything that is capable of attracting people regardless, for example a bus terminus, railway station, a public car park, library, a tourist attraction such as a historic building or museum, a church or cathedral, an office building or industrial complex where a large number of people work, a seaside resort, open countryside, national park, and so on. All built-up and many rural areas have their own fixed attractions and the popularity for footfall would depend upon the attraction.

2.9.5 All retailers are capable of creating and maintaining goodwill in their dealings with customers but a ‘magnetic’ retailer is so good at goodwill that the impact of the reputation and level of esteem will radiate and attract or draw customers to that retailer from far and wide. In retailing, a distinction may be made between dependent and magnet or destination retailers. Provided the location is accessible, it doesn’t usually matter where destination retailer is based, people will travel often long distance to shop there. For an ordinary retailer whose attraction is not especially magnetic, such retailers are more dependent upon the continuing existence of footfall generated by others. For such retailers, the trading position is therefore more critical. For magnetic and destination retailers the proximity of other retailers is unimportant.

2.9.6 Fixed attraction footfall may not be enough to support a retail business profitably, because rarely would the retailer have any control over the type of people drawn to the fixed attraction. The potential to be obtained from a trading position that includes a magnetic retailer is easier to gauge because the type of products/goods/services offered by the magnetic retailer are likely to suit particular segments or sectors of the consumer market and determine the spending power of the target customer.

2.9.7 A difficulty for the non-magnetic or not-especially-magnetic retailer is whether the magnetic retailer can be relied upon to remain in the trading position for the duration of the non-magnetic retailer’s business tenancy commitments. A non-magnetic retailer that commits, for example, to a term of 10 without a break-clause will have to be confident that the attraction of the trading position would remain at least constant and certainly no worse for the entire period. If the trading position were to deteriorate during that period of time then it is possible the non-magnetic retailer could become stuck or locked into to an unprofitable trading position and unsaleable business commitment.

2.9.8 I have said that an investor owns the property, not the tenant’s business so the fact the tenant may have got it wrong is in theory nothing to do with the landlord. In practice, the landlord can also lose out because of whether the property would let to another tenant for at least the same rent as the rent the failed tenant had agreed.

2.9.9 When appraising a trading position, the investor must be careful not to fall into the trap of jumping to the wrong conclusion (a possibility made likely as a result of the actual tenant’s comments, for example) by confusing the planning Use Class for the shop, the permitted use in the lease to the actual tenant, and that particular tenant’s style or way of going about running its business within that permitted use. It is important to recognise there is and can be a difference between the actual tenant’s experience of the trading position based upon how that particular tenant has chosen to attract footfall, and the nature and calibre of the footfall itself.

2.9.10 For example, it is by no means unusual for retailers to make pronouncements about the state of the market as a whole as if their subjective experience should be construed representative of shopper behaviour. No retailer has such a monopoly that it can ever be 100% certain that its own experience based upon how it goes about attracting and generating customers is necessarily representative. From the investor’s perspective, as owner of the property, the test of the trading position is not only the experience of the actual tenant but also the potential of the tradition for other retailers and different types of business.

2.9.11 Generally, a regional/national multiple retailer, a specialist destination retailer, a department store and a chain store are likely to be more magnet than a local or independent shopkeeper. Local and independent retailers and shopkeepers are often magnetic to a limited extent, depending upon their reputation in the local community but in the context of an investment proposition the competitive pressures on retailing generally are likely to be more burdensome for the smaller retailer.

2.9.12 When shop investments are offered for sale and whether or not the actual tenant is a multiple retailer, it is common for details of the proposition to highlight trading names of other multiple retailers and large companies in the vicinity. Boosting the attraction of the investment proposition by reference to the nearby presence of well-known retailers is designed to trap the unwary. The question is how many of the nearby multiple retailers would be interested in opening a shop in that trading position if it or the other multiple retailers were not already there. What the investor is unlikely to know (unless exceptionally well-advised and even then not 100% sure) is how many of the multiple retailers in the vicinity are planning or intending to assign their leases or not renew on expiry. When the existing landlord gets winds of the tenant’s intention and depending upon the time-scale the more cunning landlord will sell the investment well before the tenant moves on.

2.9.13 I introduced a test of a trading position in decline when I applied what is known as the knock-on effect of comparable evidence. Basically, what happens is that when rent at review are increased to a level at which it becomes uneconomical for a multiple retailer that retailer will either assign or sub-let the tenancy and relocate to a better trading position (which on the face of it may not be cheaper but is more profitable for that particular retailer) or close down the branch. If when the tenancy is assigned or sub-let or the landlord offers the shop to let on a new lease and the new tenant is not a multiple retailer, often the rent that the new tenant agrees will exacerbate the rents in the trading position, and add to the uneconomical level. Also it is unlikely a tenant of lesser reputation will contribute much if anything to the creation of passing trade. As time passes, the number of multiple retailers in the vicinity drops until the trading position becomes the sole territory of non-magnetic retailers. Often the complaints by local shopkeepers about rents and business rates (business rates are based on Rateable Values in turn calculated by reference to rents) are a legacy of an ex-multiple retailer trading position.

2.9.14 Of course, the same applies in reverse. A trading position will often improve for all manner of reasons, such as a new fixed attraction, the entrance to a new shopping centre, or a letting to a magnetic retailer in the sector of the market where there is a lot of customer spillage or excess for others retailers nearby.

2.9.15 Generally, it is very difficult if not impossible to restore the popularity of a trading position once the rot has set in. It is vicious circle: once people get used to shopping elsewhere what remains of the footfall can give the impression of no shops worth bothering with. Moreover, and although it may not be politically correct to say so, there is nevertheless a reluctance amongst many people when shopping to want to mix and mingle for all and sundry.

3.0 - Market Value

3.0.1 The definition of "market value" has become institutionalised by the International Valuation Standards Council ("IVSC") and the Royal Institution of Chartered Surveyors ("RICS"). To the IVSC,“market value” means “the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. "The market value shall be documented in a transparent and clear manner". The IVSC make it clear that a “willing seller” in that context is simply a seller motivated to sell at the best price obtainable on the valuation date.

3.0.2 In the Red Book, the RICS manual for valuers, the open market value ("OMV") is the best price obtainable in a transaction completed on the valuation date based upon the following assumptions:

(i) a willing seller (a hypothetical owner who is neither eager nor reluctant i.e. not forced but not at a price which suits only him/her).
(ii) prior to the valuation, a reasonable period to market the property and complete all the necessary legal formalities was available.
(iii) during this period, the state of the market was the same as at the date of valuation.
(iv) any bid from a special purchaser is excluded.(vi) all parties acted knowledgeably, prudently and without compulsion

3.0.3 In 1994, agreed with the British Bankers Association, the RICS Valuation Guidance Note introduced "Estimated Realisation Price", ("ERP") a basis of valuation to be used solely for loan valuation purposes. ERP is identical to OMV in representing an exchange price in the market place, but it differs on a number of points, two of which are fundamental. ‘Reasonably expected’ is retained in the ERP definition but the two fundamental points are:

(i) the marketing period commences on the date of valuation, with the sale completed after a reasonable marketing period to be specified by the valuer.
(ii) the market is dynamic and is not assumed to be static over the marketing period.

3.0.4 The opinion must be informed and given by a knowledgeable and experienced person. Valuation is not just a science, but also an art. To arrive at an opinion of value, a surveyor considers a host of factors, including intuition. In my opinion, surveyors that ignore intuition do so at their peril. The market is not always logical. Prediction may be frowned upon as esoteric, but knowing what is going to happen or at least attempting to forecast realistically is, in my opinion, just as important as basing opinion on the past or present. However, because many surveyors are focussed more on the past - for example, talking about when the market returns to 'normal' - or prejudiced by their own experience in acting for retailers whose business model depends on being able to rent shops for next to nothing - the future prospects are often ignored.

3.0.5 The market comprises buyers and sellers. Although surveyors do not make the market, it is the surveyor's interpretation of the behaviour and attitude of buyers and sellers that will have an often a profound influence upon the state and direction of the market. The reason surveyors have so much say is that, unlike the seller and/or buyer's opinion which is likely to be subjective and sentimental, the surveyor's opinion is objective. With 'subjective' the seller or buyer will assess the proposition in relation to the buyer's individual requirements, whereas with 'objective' the surveyor will assess the proposition in relation to the market.

3.0.6 In theory, objectivity is neutral; in practice it may be bias. Without training, and even then it can be difficult, it is virtually impossible for a human being to be emotionally detached. The partisan of professional standards may also overshadow. For example, chartered surveyors, as members of an institution with a code of conduct, are subject to fear of a disciplinary committee or at worst expelled. It does not help that, from my observations, the RICS is prone to issuing and revising practice statements and guidance notes for its members after the event, rather than in anticipation of market trends. One difficulty I suspect is conflict of interest between valuation surveyors and their colleagues in investment departments, and quite possibly of shareholders where surveyors operate as public or private limited companies. Ultimately, the law and the view of the courts in case-law is paramount. To quote from a textbook of Professional Negligence, the authors Jackson and Powell state "a professional is not entitled slavishly to follow the provisions of a code of practice". Per PK Finans International (UK) Ltd v Andrew Downs and Co Ltd [1992], the court's reservations about the status of the RICS guidance notes are made apparent: "I suspect that they are as much for the protection of surveyors as anything else, in that they set out various recommendations which, if followed, it is hoped will protect the surveyor from the unpleasantness of being sued". In my view, where a surveyor has informed knowledge of the market there is a duty of care to anyone whom the surveyor is advising. When a surveyor has a feeling that all is not as it should be, to keep quiet and toe the party-line is not an option.

3.0.7 So, since there is a difference between the value of a property and as an investment, how does one go about separating the two values? The question is by no means that easy to answer. To begin with, it is a question of how far back one should go. Arguably, one should go back approximately 30 years to the time before buyer inexperience took hold and when there was a marked difference between yields in different parts of the country. If so then what has happened to the shop investment market in the after-math of the sub-prime crisis, ensuing recession and downturn generally (2008 onwards) could be said to be a return to the 'norm'. In other words, values nowadays are not on the low side because they have fallen from the peak, but have merely reverted to the rightful level. When that approach is adopted, prospects become a lot clearer.

3.1 - Valuation and Over-Paying

3.1.0 I want to dispel a widely held notion, the strong belief in which leads to investors overpaying for shop property. It is a notion that has contributed to substantial over-valuation (along with over-mortgaging by the banks and other lenders) of shop property investments for more than three decades.

3.1.1 When you buy a shop property for investment, you are not buying into the existing or proposed tenant's business: the only thing you own is the property itself. That is all. How the tenant chooses to run its business, the prospects for the business including the market sector the tenant's business serves, are nothing to do with you. You are buying the property and whether it is the entire building or part of a building, that is all. Therefore, the identity of the tenant makes no difference whatsoever to the value of the property. The only relevance of what is known as the 'covenant' of the tenant that makes a difference is the chances of rent on time and other requirements of the occupancy honoured throughout the term of the lease. Therefore, if you pay a higher price because the shop property is let to a well-known covenant, then that 'premium' adds to the risk and may not be recoverable when you want to sell.

3.1.2 To understand why even though there is no link between the value of the property and the tenant's covenant nevertheless a strong connection is made, it is necessary to go back to events in the shop property market during the mid-1970s. In 1972, all Asians were expelled from Uganda by Idi Amin, the president of Uganda at that time. Those holding British passports came to Britain. Many had been businesspeople in Africa and rebuilt up their lives in Britain. Some became retailers while others found suitable employment.

3.1.3 An explosive growth in demand for shops and retail businesses led to a widespread change in attitude. Before the immigration-influx, I think it fair to say many 'white' shopkeepers were living off their laurels, for example half-day closing during the week was the norm, trading times out of kilter with an increasingly cosmopolitan society. Asian shops, the ubiquitous 'Mr Patel', opened longer hours, closing at 10pm rather than 5.30pm, and extended the shopping week to include all day Sunday. Prices obtainable in the market for selling going-concern businesses also rose. In the newsagent, confectioner, tobacconist sector, ("CTN"), it was said a 'white' buyer would pay ten times turnover, but an 'Asian' buyer would pay fifteen times turnover. The difference in price was accounted for by removing staff costs and so on, because the Asian family would work in the shop. Strictly, it shouldn't make any difference to price payable that savings can be made from being more operationally efficient, but I do not think that was the agenda. It was not so much about wanting more income, so much as wanting more capital. By modernising the business, turnover could be increased and the business re-sold for a profit. It also gave the Asian family an opportunity to establish 'roots' in the wider community.

3.1.3.1 (The presence of Asian shopkeepers in Britain was by no means new. The earliest origins of settlement of South Asians in Great Britain is uncertain, perhaps the Middle Ages. By the late 19th/early 20th centuries there were approximately 70,000 South Asians in Britain and following World War II and the break-up of the British Empire, immigration increased throughout the 1950s and 1960s as citizens of Commonwealth countries and former Caribbean colonies moved to Britain. Following restrictions on primary immigration, much of the subsequent growth in the British Asian community has come from the births of second and third-generation Asian Britons. As time passes, the formation and development of community can alter the demographics. Southall, in north-west Greater London, for example, is a case in point. In 1950, the first group of South Asians arrived in Southall, reputedly recruited to work in a factory owned by a former British Army officer. With the closeness of expanding employment opportunities such as Heathrow Airport, nowadays over 55% of Southall's population of 70,000 is Indian/Pakistani, Southall has one of the largest Sikh Temples outside India and Southall contains the largest Asian shopping centre in the London area.)

3.1.4 An attraction of English property law is freehold ownership. As the ultimate owner of the property, freehold provides both physical and emotional security. Owning shop property freehold can contribute to status in community and business. As anyone that has tried to buy shop property for investment will testify, it is not an easy step. The first hurdle is convincing commercial property agencies you are serious! It's not that surveyors were impossible to deal with, simply they have regular buyers and saw no reason to give newcomers a bite of the cherry. Also, many established surveyors can't be bothered with inexperienced investors. Then there is a question of credibility. Unless you pay the asking price or your offer is very close, you risk being considered a time-waster. Similarly, if you mess about and delay exchange of contract and/or fail to complete. Moreover, there may be a language barrier. Even if you fulfil the criteria, there is no certainty of being offered anything with potential. The solution is to buy at property auctions. Property auctions lend themselves to anonymity. Property auctions have long been popular with people of all nationalities, but before the mid-1970s there was a greater tacit understanding of shop valuation methodology. What the new wave of investors did not appreciate (or at least not give an impression) was that, in principle, a high yield suggests a shop property where little or no capital growth is expected, conversely a low-yield offers prospects for growth. In any event, because the cost of borrowing money is the same nationwide, it made no sense to be able to buy a shop property investment yielding say 12% for a lower price pro-rata than a shop property showing 7%. Hence, what began to happen and rapidly gathered steam, until the influence of the change in approach became the 'norm', was for shop properties having little or no growth prospects to go up price which in turn led to an increase in price for properties with growth prospects.

3.1.5 Finance plays a pivotal role in the commercial property market. It is said that property investment is more about finance than property. When a buyer wants to mortgage an investment property, or needs a mortgage in order to buy the property in the first place, ways to repay the mortgage include the borrower's other sources of income and whether the yield on the property exceeds the instalment for payment of the mortgage. Whilst a lender will assess the credit-worthiness of the borrower, a lender is not normally interested in the prospects for the investment: all a mortgagee cares about is whether the borrower could honour the requirements of the mortgage, or in the event of default the property could be sold to repay the loan. The fact that high-yielding investments are more risky is of no consequence to the lender, and may in fact be considered more secure simply because of a higher yield. In effect, thanks to their mortgage criteria, what the banks have imposed on buyers of shop property is the equivalent of a business plan, whereby never mind whether the shop property constitutes an investment, all that matters is that the financial side of things stack up.

3.1.6 What stemmed from inexperience became the 'norm' thanks to mortgage valuation surveyors. The task of a mortgage valuation surveyor, often a chartered surveyor, is to give an opinion of the market value of the property. However, the market value of a property is only the value of the property itself. It is not the value of the investment. The investment comprises the property and any existing or proposed 'tenancy' involving that property. So, since the value of the investment can vary depending upon terms of the tenancy, arguably a valuation surveyor should make that clear in the report, otherwise there is the risk the banks could be misled into thinking lending on the property is more secure than it is.

3.1.7 The fact that a layer of variable value can be added to the intrinsic value of a property is not something lost on sellers. The marketing of commercial property for investment involves very sophisticated and shrewd techniques. For example, one of the most obvious ways to maximise the price is to create an investment that is readily mortgageable. When selling a shop property investment, the seller is not interested in the value of the property as such, but how much the property and all that comes with it is likely to fetch in the market. It is the existence of that subtle difference for which the inexperienced investor can pay a hefty price. Selling a shop property for investment is no different to any other form of selling. Dress it up to look its best and hope the buyer doesn't spot what's wrong. Any complaints afterwards can be met by caveat emptor: the buyer alone is responsible for checking the quality and suitability of goods before making the purchase. Moreover, unlike products and services where the seller might be concerned to safeguard reputation for future custom, a seller of shop property is unlikely to care a jot about goodwill.

3.1.8 Although the seller of shop property is unlikely to care about goodwill, the seller's agents are mindful of their reputation in the market. To maximise the selling process whilst attempting to minimise the repercussions of overpayment, auctioneers have, for some time, highlighted the financial status of the tenant in the auction catalogue, for example the retailer's number of branches, latest turnover and profit figures.

3.1.9 Covenant and early review lots are guaranteed to fetch top prices. In the details, much emphasis is given to the date of review, with the estimated rental value suggested, either by having issued the rent review notice quoting a very high proposal, or by stating the vendor's opinion of rental value, or by citing a brief mention of a nearby new letting.

3.1.10 Pre-occupation with quality of covenant has driven investment yields down to levels which, for the type of property, is more commonly expected for prime propositions, offering assured long-term growth!

3.1.11 Consequently, what has happened is that not only has the way shop property is valued disconnected from fundamental principles, but also the banks and vested interests have create a market that is completely divorced from the reality of property itself. The test of that claim is easy to pass, for example: imagine two shop properties, next door to each other, both shops identical size, layout, etc, both let for 20 years at the same rent with rent reviews at five yearly intervals. One shop is let to a national multiple retailer with dozens of branches, the other to a local shopkeeper with just that one shop. Both properties are offered for sale by auction on the same date by the same auctioneer. What's the betting the shop let to the multiple retailer would fetch a higher price?

3.1.12 In my opinion, it is not up to valuation surveyors to insist banks lend only on the value of the property, as distinct from the market value of the investment. That decision is for the banks alone. However, I do consider valuation surveyors have a duty of care to ensure the banks understand there is a difference which might not necessarily be allowed for in the 'forced' sale valuation. A definition of 'forced sale' valuation is "the highest price which a property can reasonably be expected to bring, if offered for sale without the consent or concurrence of the owner by virtue of judicial process, in what may be a restricted market place, within a restricted time frame, to a prudent, willing and able purchaser who may have limited knowledge about the property, its uses and capability." If the forced sale valuation is a percentage of the market value of the property then in my opinion the mortgage is likely to be more secure, than if the forced sale value is the valuation of the investment.

4.0 - Business Tenancy

4.0.1 The construction or framework of a lease, its content and wording, lays down the contractual responsibilities and obligations that the landlord and tenant have to one another in relation to the premises. The operation, management and enforcement of the terms and provisions of a lease are subject to business tenancy law. A branch of property law, business tenancy law is a dynamic subject.

4.0.2 With business premises, there is no standard form of lease, so the terms and conditions of each and every tenancy will vary depending upon the requirements and experience of the first landlord and first tenant and their respective advisers. Since a tenancy is often granted for a number of years, the terms and conditions, together with the wording and phrasing of those terms and conditions, will remain unchanged for the duration of the contractual term of tenancy, and sometimes beyond. The only ways any of the terms, conditions, the wording and phrasing can be changed at any time during the term is either by rectification of a mistake (if the original parties are still involved) or by mutual agreement.

4.0.3 Although a tenancy can last for years, there are two relationships that can and do change. The first is the relationship between the landlord and tenant: that relationship is changeable because the superior landlord’s interest may be bought and sold or transferred and (subject to the provisions of the tenancy) the same for any intermediate landlord, and (subject to the provisions of the tenancy) the tenant’s interest may be assignable or the premises underlet.

4.0.4 The second is the relationship between the premises and the (open) market: that relationship is continually changing because, whereas the property (the building) is a fixed structure, the relationship between the location and position of the building and its surroundings can be affected by changes in those surroundings, and of which the landlord and/or tenant is likely to have no control.

4.0.5 The reason business tenancy law is a dynamic subject is that the operation and enforcement of the terms and provisions of the tenancy will depend upon the actual wording in the lease and associated documentation, regardless of what might or might not be happening in the open market. The wording and phrasing in leases is also fashionable. So, for example, if the premises were let for 25 years from 1990 with rent reviews at 5 yearly intervals, then the wording and phrasing would have been based on lease-draftsmen thinking in 1990 or before, whereas the effect of that wording and phrasing might have a different consequence at first rent review in 1995, but the consequence could be different again in 2000, and different again in 2005, and 2010. Although words are neutral, positive and negative conniptions can be attached to their meanings and whether a word or phrase should be interpreted literally or by reference to what is known as “presumption in favour of reality” would depend upon the business tenancy law case-precedent and valuation practice at the appropriate time.

4.0.6 Some business tenancy law is legislation, acts of parliament, statutes, orders and regulation, but much is based on case-law: a court decision and interpretation arising out of disputes. You will find more information about dispute resolution procedure in section 2.26 (Disputes). Generally, the courts are loathe to interfere in the wording of a commercial contract, regardless of how unfair the consequences of the agreement, and tend to confine to the interpretation of the wording. A general principle of construction that applies to all documents is that a lease must be construed as a whole and an individual clause in a lease should never be read in isolation from the rest of the lease. The interpretation of construction (wording and phrasing in documents) can be fashionable, but nowadays there is a presumption in favour of reality and commercial common/good sense.

4.0.7 Since the 1970s, the explosive growth of case-law has reflected the monetary effect of different interpretations by surveyors, lawyers and courts on the covenants in the lease. (In one case, the difference in opinion equated to £500,000 a year.) In 1984, in my booklet published then, I said that the variation in business leases was extensive. Then were the old ground leases from the 1880s/1890s for a term of 99 years at a fixed low ground rent, the medium to long-term leases granted during the 1920s to reflect difficulties in attracting tenants at that time, the familiar 21 year term originating in the 1950s/1960s often incorporating pre-fixed rental increases at 7 yearly intervals; and from the 1960s to 1980s, a mixture of 3, 5, 7, 9,10,12,14, 15, 20, 21 and 25 years which, to cover for inflation, incorporate rent reviews at 2, 3, 4 or 5 yearly intervals. Some leases even exist that incorporate a clause enabling the frequency of reviews to be revIewed. In 2012, new lettings in better trading position are commonly 10-15 years with 5 yearly rent reviews, and for local trader positions 2-5 years, often with break-clauses, but the unexpired duration of existing tenancies remains unchanged depending upon when the leases were granted. The consequences of the diversity is relevant when drawing comparison between what a tenant would reasonably expect in the market today compared with terms of the actual tenancy

4.0.8 In principle, there is nothing to prevent the parties to a lease from agreeing whatever they like but any wording or phrasing that would be contrary to law is normally subject to overriding legislation.

4.0.9 Despite a working system for the management of tenancies, the relationship between landlord and tenant often creates hostility, borne of mutual suspicion. Basically, the interests of landlords and tenants are diametrically opposed: invariably, the landlord wants more, the tenants less. The notion that the partIes should work together to achieve profIt, the landlord from rent, the tenant from retailing, is not prevalent In this country, so the parties seem to be at constant odds with one another. Any change in ownership of the landlord’s interest often brings new problems and a purchase during an era of high prices or interest rates adds Its own pressure by fuelling the need for full compliance and maximum rent to enhance capItal value. At rent review, the relationship between personalities is not improved by a principle in business tenancy law whereby neither the specIfIc requirements of the landlord nor the tenant’s ability to afford the market rental are relevant; in recessionary times or when the tenant’s business is not doing as well as the tenant would like, the difference in opinion or interpretation between landlord and tenant as to how a particular term or condition of the tenancy should be applied, or what the market rent should be at rent review or on lease renewal will often lead to conflict and triggering of the dispute resolution procedure.

4.0.10 For both lenders, landlords and investors, the effect of change on the relationship between the property and its surroundings is challenging. A shop let at for example £30,000 a year for 15 years with upward-only rent reviews at 5 yearly intervals for which the investor pays £420,000 on mortgage 65% of purchase price will (all other factors remaining constant) only maintain the same value and same loan-to-value (“LTV”) if £30,000 a year would fetch £420,000 (7% yield) for the entire period of mortgage. Amongst possibilities that could arise are 1) that the market rent could fall at any time even if the rental actually payable were protected by the ‘upward-only’ cushion at rent review, thereby resulting in an over-rented investment and a downward adjustment in capital value; 2) the closer the remaining term of tenancy to its contractual expiry date the investment market might want a higher yield to offset possibility of the tenant not renewing, unwanted vacant possession, and 3) the possibility of a lesser covenant upon reletting in the market. Even if the rent were to increase at one or more reviews, it does not follow that the rent payable would be the market rent for purpose of capital value because the capital value at any point in time has regard to the estimated market rent and how that rent would be arrived at would either be as laid down in the lease (for purpose of rent review) or if the tenancy would qualify for renewal rights then by reference to section 34 and 35 Landlord and Tenant Act 1954 Part II.

4.0.11 Although rental and capital valuation is a matter of opinion, for value (of commercial property) to have efficacy it must have regard to business tenancy law. Business tenancy composes legislation and precedent, but that does not mean that the opinion of value has to agree with either the law or a precedent. A precedent may be useful but does not have to be followed slavishly. Business tenancy law is rarely concerned with wider consequences so in practice things may not work like that, because every lease and every shop property is different. Valuation is not about applying the law or a precedent literally as if the law or a precedent were indisputable, but using the law or precedent in conjunction with the art and science of the opinion. In other words, never mind the theory, a question a valuer would ask is what is the practical effect of that law on this particular set of circumstances. For example, an estimate of market rent could be provided for purpose of forthcoming lease renewal negotiations, but in practice the existing tenant might not want to pay the market rent so only if the tenant would want to renew would the dispute procedure be pursued. Even if the landlord were successful in obtaining the market rent by order of the court, the tenant would not be obliged to proceed, but could give notice to end the tenancy.



4.1 - Lease

4.1.1 In the relationship between landlord and tenant, the landlord owns the building and the premises demised to the tenant is the whole or part of the building. The tenant leases the demised premises (or premises) and the legal relationship between landlord and tenant is based upon the terms and conditions of the lease. The terms and conditions are often described as provisions.

4.1.2 The terms and conditions of a tenancy are embodied in a document, known as a 'lease'. Although the word ‘lease’ is commonly used, actually the lease is the document, the type of occupancy either a tenancy or licence. I use the terminology ‘lease’ loosely, because the terms and conditions of a licence are also in a document, but calling a document a ‘licence’ does not make it one.

4.1.2.1 The landlord owns the building (the property): the granting of a lease does not give the landlord any share or control of the tenant’s business. The only thing a lease does is spell out the terms and conditions and the basis upon which the tenant can use the landlord’s property. Even where the rent is based on the turnover of the tenant’s business, how the tenant chooses to run its business at the premises is nothing to do with the landlord, except as regards compliance with the terms and conditions of the tenancy.

4.1.2.1.1 [The one time a landlord could be said to be buying the tenant’s business is when the landlord intends to occupy the premises on expiry of the lease for the same type of business, in which case any (residual) goodwill attaching to the premises by virtue of the tenant’s business or occupation of the premises would revert to the landlord. Even so, the actual business records, stock, tenant’s fixtures and fittings, plant and machinery, would not belong to the landlord unless the tenant were to leave such items behind on vacating the premises. If the tenancy would qualify for renewal rights under the Landlord and Tenant Act 1954, then a landlord can oppose the tenant’s application for renewal on ground of re-occupation provided the landlord has owned the property for at least 5 years. Unless the landlord can find a legitimate way to wriggle out of paying, the tenant would receive compensation based on Rateable Value.]

4.1.3 Frequently in leases, the landlord is described as 'lessor' or 'lessors' - the plural is sometimes used even though there may be only one party - and the tenant as 'lessee' or 'lessees'. Also, when the landlord is the officers of an administrative body, for example the "Mayor and Burgesses of..." the landlord could be described as the "council" ; and with railway leases, the landlord is often described as "the Board". Although for some aspects of a tenancy the correct description is necessary, in this section and unless otherwise stated, I shall stick to landlord, tenant, and tenancy.

4.1.4 The operation and enforcement of the legal relationship between landlord and tenant is subject to business tenancy law. Agricultural property law, which is in a field of its own (excuse the pun) is, in some respects, arguably more progressive: for example tenant's improvements are not limited to physical alterations to the property, but include the intangible. Although residential property law also differs, there are some overlapping areas. For example, with a shop with a residential flat above and where the shop and flat are let on a business tenancy, a rental valuation of the flat may be subject to business tenancy law. 

4.1.5 Generally, a shop investment is a shop property that is let on a tenancy (or some other occupancy where rent or equivalent is paid). What I am about to say may sound pedantic but, in my opinion, a vacant unlet property is not an investment until it is let. A property that is empty because the tenant is not in occupation is nevertheless let. I think a distinction is useful because whereas a vacant shop would upon letting be an investment, really there is no investment without a tenant. (A vacant unlet property may be considered an investment if the capital value of the property were to increase for some reason, but for purpose of Shop Investment the test is whether the property is producing any income.)

4.1.6 The relationship between landlord and tenant hinges upon the terms and conditions of the tenancy. A tenancy (or ‘lease’) is a contract for a certain term and has a date of document, a tenancy contractual start date and contractual expiry (end date). When a tenancy is for a business purpose, the lease is a commercial contract, and with a commercial contract the parties are in law deemed to know what they are doing.

4.1.7 Basically a lease contains terms and conditions for the operation, management and enforcement of the tenancy. The landlord and tenant, known as the parties, can agree whatever terms and conditions they like for the tenancy, but some requirements are governed by overriding legislation. 

4.1.8 Because different landlords and different tenants have different requirements and shops, in common with all commercial properties, are different, there is no standard form of lease in use generally. Whilst many landlords and tenants have their own standard wording for the documentation, also the Law Society, for example, has a standard document for use by landlords and tenants, you cannot buy a ready-made document and simply fill in the blanks and reasonably expect the tenant to sign without question, or at least not without changing some wording. Normally, what happens is that after outline terms have been agreed between the parties and 'heads of terms' agreed, the lawyers for the respective parties, sometimes with the help of respective surveyors, draft and approve the documentation from scratch. 

4.1.9 In England and Wales, any outline terms agreed in principle or “heads of terms” are “subject to contract”. It is important to state that all the terms are “subject to contract” - that is not implied by default. “Subject to contract” results in one of three possibilities: 1) the parties are immediately bound to the transaction, but they intend to restate the deal in a formalised contract that will not have a different effect; or 2) the parties have completely agreed the terms, but have made the execution of some terms in the contract conditional on the creation of a formalised contract; or 3) it is simply an agreement to agree and the transaction will not be concluded until the formalised contract has been drawn up, approved and completed.

4.1.10 Agreement may also be reached to subject to any other condition, such as subject to surveyor or subject to finance, but unless the agreement is also made subject to contract, it may not be possible for either one or both parties to withdraw from the agreement after the condition is satisfied, without having to pay damages for breach.

4.1.11 Generally, in commercial property transactions, the conveyancing for buying and selling is “subject to contract” and any other conditions specified alongside. Under the Law of Property Act 1925 (as amended), contracts for the sale or disposal of real estate have to be in writing to be enforceable, and in some instances by deed. Since a lease is the document, it follows a lease will automatically be in writing. A tenancy, however, may be in writing or verbal/oral. The advantage of a tenancy in writing is the existence of a documentary record of the agreement between the parties. Even when the wording of the agreement is ambiguous, the construction of the contract open to differing interpretations, it is nevertheless generally easier for the parties and others to grasp what has been agreed when the matter is in writing, rather than have to rely on memory or one party’s word over the other, as is the situation with a verbal or oral tenancy.

4.1.12 The onus is on the landlord's side to draft the document and on the tenant to approve. Because tenancies often last for years, and the wording of terms and conditions can be fashionable, the content of leases varies considerably. Also, although the terms and wording of a lease cannot be changed after completion, except by rectification or mutual agreement, leases are assets that can be bought, sold, transferred and mortgaged. During the life of a lease it is common for related or associated agreements to be entered into by the parties and/or their successors. Such agreements include deeds of variation, rent deposit deeds, licences to alter, change the use, assign, underlet, rent review memoranda, and side-letters.

4.2 - Documents

4.2.1 Although the terms and conditions of the completed agreement are commonly referred to as the lease, in fact the lease is just the document itself. The document is a written record of the terms and conditions that comprise the agreement between landlord and tenant for the premises.

4.2.2 Although I used to refer to a situation using the word ‘lease’ generally, I find that using the correct description, such as tenancy or licence, avoids confusion, so nowadays in all my writings I use the correct word depending on the circumstances.

4.2.3 Confusion can arise when, in the drafting of a lease, the draftsman uses the word ‘lease’ when referring to commencement dates for purpose of term, rent, and rent reviews. In modern leases, each expression or phrase will usually be defined in the lease so as to leave no scope for different interpretation, but where the draftsman does not, or phrasing or expression definitions are incomplete, and instead refers casually to the date of the lease, an ambiguity can arise where the lease states that rent reviews are at stated intervals during the term but the review dates themselves are calculated from commencement of the lease.

4.2.4 For some reason, best known to the world of lawyer-draftsmen, the wording and phrasing in leases, especially in the realm of rent review, is often unbelievably convoluted. Commonly, rent review dates are not specified, such as 25 December 2006, 25 December 2011, but referred to as intervals such as 5th and 10th anniversaries, which is all very well provided it clear from the wording of the lease from which each particular anniversary is computed.

4.2.5 Generally, any and all other documents related to the lease may be loosely included in the definition of lease. Usually, other documents, such as licences to alter, vary the user, deed of variation, deed of rent deposit, memoranda, and side-letters, are likely to mention the lease itself, so the wording and content of associated and related documents could affect the rental and/or capital value.

4.2.6 Side-letters are informal agreements by landlords to alter provisions in leases by exchange of correspondence with the tenant and are usually entered into when the parties want to agree some concession or arrangement personal to one or both of the parties. For example, a rent deduction for a period of time, arrangements re building insurance, Usually, a side-letter issued concurrently with the lease and given to the tenant at the outset is part of entire package and is binding on new landlords, even if new landlord had no knowledge of its existence. [In System Floors Ltd v Ruralpride Ltd [1994], the Court of Appeal decided that a side letter passing from a landlord to a tenant, the benefit being expressed to be "personal to the tenant" but not "personal to the landlord" was binding on a buyer of the landlord's interest, even though the buyer knew nothing of the letter]

4.3 - Rent Review and Tenancy Renewal

4.3.1 Rent review, tenancy expiry and lease renewal are subjects in their own right. Rather than provide any information here, please visit Rent Review Matters where you will find a vast amount of information. Also, you may like to read the ML Guides.

5.0 - Planning Permission

5.1 Town planning is a function of Central and Local Government and is a democratic process. Since 1948, planning permission has been required for all new development. The person wanting permission makes an application to the appropriate planning authority, the application is publicised, and interested parties notified and objections invited during the consultation period. The planning officer makes a recommendation to the planning committee which decides whether to grant the permission. Having obtained permission, the applicant does not have to implement the permission, but the life of a permission normally expires after 3 years. If the application were refused then the applicant may appeal, in which case the matter would be considered by the Planning Inspectorate for England and Wales, an executive agency of the Department for Communities and Local Government, under the auspices of the Secretary of State.

5.2 A planning permission attaches to the property and does not belong to the applicant personally, although the applicant may be the only person able to comply with any conditions attached, or to implement the permission. Anyone can make a planning application and they do not have to be the legal owner of the property.

5.3 Whether a property can be used as a shop, office, factory, warehouse, or for any other type of business depends on the planning permission. 

5.4 In England and Wales, the legislation governing planning use is the Town and Country Planning (Use Classes) (Order 1987. [Applicable in England only is the Town and Country Planning (Use Classes) (Amendment) (England( (Order 2005) which redefined Use Class A3 as A3, A4 and A5] Some uses are considered to be sui generis, which means they are outside the existing uses classes.

5.5 The default Use Class for shop property is A1, but the type of business carried out by the occupant at the premises will determine the required use for planning purposes. For example, banks, financial services, and betting offices are Class A2 users, restaurants, cafes, take-away hot food come under Classes A3 and A5.

5.
6 County Councils will have a Core Strategy Plan (or similar) that is updated every 10 years or so. For each town in the county, shopping areas are defined and there may be a quota of permitted uses. Generally, planning authorities oppose the loss of local shopping facilities (A1 use), even if there could be more demand from other use class businesses. Since planning permission for some uses can be more difficult or impossible to obtain, the existence of or potential for that use can enhance the value of the property. Also, the permitted use in the lease might include uses which would justify a greater rent, even though the tenant might not want to use the property for that particular use.

5.7 As well as planning permission obtained or on appeal, the actual use of the property may be established use.  An established use is a use that has been in continuing existence for a long period of time (at least 4 years and up 10 years depending upon the use) and the right to obtain a "certificate of lawfulness of existing use or development" is not something the planning authority can oppose, but the applicant must be able to prove conclusively the established use.

5.8 Certain types of development are excluded from the definition of development, such as routine building maintenance and repair. Many categories of minor development are classified by law as permitted development and that grants an automatic planning permission, rather than requiring any specific application.

6.0 - Investment - Generally

6.0.1 Investment is about becoming better off, financially, and whatever you invest in is known as an 'asset'. (Whether an asset goes up (appreciates) or down (depreciates) in value doesn't make it less of an asset. Whether it can turn into a liability is a separate issue!

6.0.2 Investments are categorised as liquid or illiquid. Cash and cash-equivalent assets are 'liquid' investments. With a ‘liquid‘ investment you have (immediate) access, either to buy or sell or withdraw funds.

6.0.3 Similarly, although capital value* fluctuates, stocks, shares and bonds are also considered liquid, because the ‘money’ markets are structured for almost instant liquidity. [*The value of the investment is known as its 'capital value'] Even so, the capital value can fluctuate because the stock market is volatile, so stocks, bonds and shares are riskier.

6.0.4 With cash on deposit, it is unlikely you could lose your capital and all UK regulated savings accounts are covered by the Financial Investors Compensation Scheme, a government-backed scheme providing investor protection up to a set amount.

6.0.5 Compensation limits vary - information can be found at http://www.fscs.org.uk/what-we-cover/eligibility-rules/compensation-limits/ - so many people like to spread the cash around numerous regulated organisations in order to ensure maximum protection for deposits; even so it is generally considered remote for the likelihood of a UK regulated financial organisation to fail.

6.0.6 Unlike cash, and cash-equivalents, property is an illiquid asset. An illiquid asset is one that cannot be readily converted into cash (or cash-equivalent) quickly and with minimum loss of value. Furthermore, depending upon the form of the illiquid asset, it may only be possible to cash an illiquid investment by selling it to someone else. When an illiquid investment produces an income, it may be possible to mortgage the income secured against the value of the asset.

6.0.7 There are practical advantages of liquid over illiquid assets. Liquid assets are portable. Money may be defined as any good or tokens that functions as a medium of exchange that is socially and legally accepted in payment for goods and services and in settlement of debts. Money also serves as a standard of value for measuring the relative worth of different goods and services. The use of money provides an easier alternative to barter: in a modern, complex economy bartering is considered inefficient because it requires a coincidence of wants and an agreement that the needs are of equal value before a transaction can occur. The efficiency gains through the use of money are thought to encourage trade and the division of labour, in turn increasing productivity and wealth.

6.0.8 As an illiquid investment, property is high-risk. That does not mean the risk can never be low or minimal, simply there is no guarantee the market value of the property could be realised when the cash is required. To do so would require the certainty of a buyer at that price, completing the purchase and transferring the money on that required date.

6.0.9 With an illiquid investment, risk is not only about what you could lose in terms of how the investment performs, but also whether you could get your money back at any time. Performance is a matter of skill and judgement. The only way to get your money back is to be certain someone else would buy the investment at any time in the future for at least the same price as you paid.

6.0.10 Where many inexperienced investors go wrong when buying is not thinking whether someone else would pay the same. It’s no good thinking, for example, that since there were other bidders at the auction and you only paid slightly more than the under-bidder, when you want to sell there is sure to be as much interest. Auction prices are not representative of market value: all they represent is how much someone paid on the day of the auction.

6.1 - Asset

6.1.1 An asset is something, a quality, or a person, of use or value.

6.1.2 An asset is something owned by a person or business that is regarded as having value. An asset can appreciate (go up in value), or it can depreciate (go down in value). An asset will have three values: intrinsic value, scrap value, and artificial value.

6.1.3 Intrinsic value is the price/cost of the materials and workmanship for making of the asset. Scrap value is the value of whatever the asset is made of.

6.1.4 Artificial value is how much someone would be willing to pay, regardless of the intrinsic or scrap values. How much more or less would depend upon supply and demand. Generally, the supply of assets that would attract artificial value is limited and often scarcity maintains an artificial value. As for demand, I talk about that subject in more detail under the heading 'marketing'.

6.1.5 Value itself is generally a matter of opinion, what the market would bear, and the nature of the transaction.

6.1.6 For the investment strategy, and the investment medium, and investment performance to work together successfully, the relationship between them must have an understanding of the processes that are necessary to bring about the experience. Essentially, the relationship revolves around the attitude of the investor, and the principles and process of marketing.

6.2 - Cash

6.2.1 Cash is traditionally regarded a negative investment, because cash offers no scope for capital appreciation because, by virtue of inflation, the spending power of the capital will diminish. Even so, interest can mount up so it is important, when considering alternatives to cash, to allow for costs.

6.2.2 For example, if you were to deposit £500,000 at 3.5% pa fixed for 5 years, then after 1 year you would have £517,500. After year 2 you would have £535,612, after the 3rd year £554,358, 4th year £573,761 and by the end of 5th year £593,843. Whereas if you were to spend £500,000 on a property (yielding 3.5% pa) and sell after 5 years then, assuming no change in rent, you would also have £593,843 but you would lose approximately £30,000 in buying and selling costs and Stamp Duty alone; and that does not include non-recoverable ownership expenses over the 5 year period.

6.2.3 Since property is an asset, it provides a mortgageable security. A difference between cash on deposit and buying a property is gearing, whereby it is possible to borrow against the security of the asset (including any rental income) and buy a higher-priced property than the bare cash alone, but the costs of borrowing, including likely requirement for the value of the property to exceed the amount of loan by a specified percentage, creates a burden of responsibility over which the borrower may have no control. For example, if the loan must not fall below 80% of the value of the property, then any reduction in that value could breach the loan covenant. To remedy the breach would require either the borrower injecting more equity (if funds were available), or the lender restructuring the loan agreement if so minded; or the lender requiring early repayment of the loan or repossessing to get as much as possible of the loan repaid. Restructuring presupposes the lender would be relaxed and the borrower could afford to pay differential terms. The snag with repossession is not only that the borrower could lose out in loss of equity, but also the investment potential would end up with someone else.

6.2.4 With gearing, it is important to remember there is no correlation between a higher-priced property and higher-value. A higher-priced property is simply the price that the market at the time places on the proposition. Whether value would be more or less depends upon the price and the potential. For example, in the institutional investment market, comprising life insurance companies, investment trusts, pension funds, property funds, sovereign investors, and others that are responsible for investing other people’s money, there is normally a minimum lot size for a proposition, the amount for which may be out of reach for other investors. The amount of minimum is usually taken to mean including specific criteria that in the opinion of the institutional investor would only likely to be found in that price range. Whether the scope for rental and/or capital growth is more likely is questionable: the institutional investors is just as likely to get it wrong as any other investor. You only have to read the excuses dished out by property fund managers as to why the values of their portfolios have collapsed to realise that!

6.2.5 Even if you never sell, even if you were to keep the property to pass on through the generations, it does not follow it would necessarily go up in value once all costs and adjustments are accounted for. A property would go only up in value and become an investment when its value increases by more than costs and adjustments and at least maintain that level of increase during your period of ownership.

6.2.6 Over 5 or 10 years, the likelihood of no growth on property might be thought remote. However, because the property market is imperfect - with no certainty the property would sell for what it is valued at - prices are volatile, investors are fickle and there is no correlation between rents and inflation. All in all, profit is about timing: when to buy and equally when to sell.

6.2.7 Although I should expect many people to disagree with my definition of investment, it seems to me that to ignore the costs, loss of interest, inflation and tax is delusion. I think that if you are going to run the risk of using cash, and possibly borrowing to buy a shop property for investment, then you should reasonably expect a reward to compensate for the risk. Running hard just to stand still is not, in my opinion, a particularly productive use of resources. Although a property has to belong to someone, I should like to think that, by the time you have read Shop Investment you would appreciate the difference between owning property that just happens to be let, and being a successful investor.

6.3 - Mortgage and Loan

6.3.1 Even if they start by using cash, many purchasers are concerned with the cost of financing property. In my experience, they can often be more concerned with finance than the value of the proposition. This situation typically arises when property is offered at a high yield, compared with interest rates, but not high enough when measured on (traditional) investment criteria.

6.3.2 Depending on lending criteria, that may range from stringent to lax depending the lender's policy at the time, commercial mortgages can usually be obtained for between 40-70% of capital value, provided the cost of repaying the mortgage is covered by the rental income.

6.3.3 When a mortgage based on the value of the investment, as distinct from the property, and if the investment value has gone up, it may be possible to remortgage.

6.3.4 Where a rent is subject to early review or the tenancy to expiry (reversion), mortgagees will normally lend only by reference to the rent passing, but subject to the borrower's other resources and the relationship with the lender, it may be possible to extract extra funds in anticipation of the level of increase and its immediate effect on capital value. Once the new rent is established, it may then be possible to re-mortgage so as to release further equity.

6.3.5 The source of finance is important. Since the price of shop property can be substantial and may be beyond the reach of cash buyers, where would the money come from to fuel demand for shop property investments?

6.3.6 The answer is there is plenty of money about. You only have to look at the turnover figures for retailers and other businesses to realise how many GBP billions are in circulation. The criteria for bank lending is judicious choice of borrower. By lending (more) to fewer borrowers, the banks are doing what all forward-thinking businesses have been doing for years: moving away from the mass-market catering for everyone and concentrating on the more profitable customers/borrowers.

6.3.7 The amount of funds and facilities for borrowing determines flexibility. Income can be used to finance mortgage, capital can be released for buying a second investment and so on. If you do not want to borrow, then your purchase would be limited to your own resources, the price range and/or required initial yield, in which case decisions can be harder for fear that something better might turn up. The more you have to invest, the more flexible you can be. Even so, successful investment in shop property is not about spreading the risk, but buying wisely.

6.3.8 A wise investment is one that performs through thick and thin. Property performance is a measure of confidence. At any time the value of a shop investment is what other investors in the market at that time would pay, but how the value is calculated depends upon the terms and provisions of the tenancy and that depends upon the tenant’s agreement or if a dispute has to be resolved then the tenant’s conduct in the aftermath.

6.4 - Interest Rates

6.4.1 For Base Rate changes since 1989, please click here.

6.5 - Investment Strategy

6.5.1 Investment is about becoming better off, financially. Strategy is a subjective plan of action or policy designed to achieve the objective. A strategy comprises two parts: the subjective and the objective.

6.5.2 Subjectively, the components include your particular financial circumstances, commitments, life-style, and aspirations.

6.5.3 The objective components include knowledge of the investment medium, whether your choice of investment medium is likely to perform to your expectations, and the proposed time-scale.

6.5.4 The objective components also include external events over which you have little or no control. For example, things that happen as time passes that can reduce the value of money, typically inflation: an economic term for a general increase in prices, which affects purchasing power; often things generally cost more as time passes so you’ll need more money to buy what you bought before, unless there are cheaper or alternative ways. Another example is tax: the rate and amount of tax payable on any income or capital gain will reduce the net profit.

6.5.5 In the case of shop property, another example is that location and/or trading position can improve or deteriorate over time. It is by no means unusual for what starts as a prime proposition to become secondary over the years, or conversely a secondary position to become a prime position. An example of how that situation could arise is the arrival of a new shopping centre development in the town or region, or the relocation of a major retailer. The important thing to remember is that whereas a building is in a fixed place, the relationship between that place and its surroundings is not. The relationship between the retailer and the particular shop is not necessarily fixed.

6.5.6 Although property has a reputation as a hedge against inflation, that can be a very-long term experience. Generally, property is a depreciating asset - that is, it goes down in value. For an asset to appreciate, numerous factors have to come into play and understanding what they are and how and when to capitalise on the opportunities is the hallmark of a successful investor.

6.5.7 I advise on strategy and am told that is unusual amongst surveyors. For the most part, investors formulate their own strategies and either source propositions by buying direct from sellers, and/or by private treaty, tender and auction and/or ask or retain agents to procure propositions. The snag with doing-it-yourself is that your criteria might not be satisfied by the type of propositions generally available, whereas the advantage in talking things through with an experienced surveyor is to ensure that what you have in mind would be feasible.

6.5.8 Unlike the Stock Market where you can normally buy shares in whatever company you like, the commercial property market is not fluid. Many properties never or hardly ever come onto the market and within the rare category are usually snapped up quickly. That leaves the rest and whilst they can be a lot to choose from, the reason they are probably more likely to be available is that their investment prospects are limited.

6.5.9 To formulate strategy, preliminary questions include do you have any experience of commercial property and why do you want to buy a shop investment; why not offices, industrial, leisure or a pub?

6.5.10 Answers might include everyone goes shopping and you can judge for yourself what is happening generally, whereas office, industrial and leisure property is more specialised, buildings often sizeable, so pricey for private investors; construction is prone to obsolescence, leading to capital expenditure for refurbishment; letting subject to longer voids; and while there may be development potential or scope for alternative use such as conversion of offices into flats, rental growth prospects may be limited because occupiers rarely compete for premises.

6.5.11 Although you may be able to judge for yourself what is happening, such observation is often superficial, because you do not know what the tenant is planning (well-advised or experienced tenants never keep the landlord informed). So if you fancy a shop property investment because you are fed up with the Stock Market then ask yourself why you think you would do any better? If you don’t have what it takes to pick winners on the Stock Market then why do you think you will fare any better in the commercial property market?

6.5.12 If the answer is that you would be in control then think again: although landlords may think they have the upper hand, business tenancy law and valuation can work both ways so control is often in the hands of the tenant.

6.5.13 Negotiating skills, including whether landlord and/or tenant is properly advised, can make or break an investment.

6.6 - Performance

6.6.1 Performance is the action or process of carrying out or accomplishing an action, task or function. The physical form of an investment is the medium or ‘vehicle’ for the performance. The form may not have been designed for the purpose; it may have been adapted, altered, or improved, but no matter the original shape essentially the medium is the store of value.

6.6.2 Often, choice of medium is based on myth, a widely held or false belief or idea. Generally, for example, cash on deposit at a bank or building society is not regarded a positive investment; even though, arguably, cash on deposit is the most secure investment. It is secure, because you can take out (withdraw) your money (almost) immediately; and the capital amount is almost certain to increase, because it is likely interest would be paid on the capital and can left on deposit for compounding (interest paid on interest). Even if the rate of interest were considered derisory, compared with other forms of investment, nevertheless interest would normally be credited on a daily basis, so you can calculate how much your investment is worth at any time.

6.6.3 Although rarely considered a positive investment, cash is the absolute of investment performance. Since the cash remains undiminished, cash on deposit is (relatively) secure, so interest on cash deposits, or the yield on gilt-edged stock (which, as government bonds, are considered secure), is used as the benchmark for other forms of investment.

6.7 - Indirect Investment

6.7.1 Whether you invest direct or through a property fund manager, the same principles and the same approach to appraisal will apply. The fundamental question is whether the property has the potential to become an investment, or whether you are simply buying a property that is or could be let.

6.7.2 In my opinion, property funds are the ‘first-time buyers’ of the institutional property market. A property fund is a product of the financial services industry and is designed for the express purpose of generating fees for fund managers and shareholders of the parent company. When the mood of the moment (market momentum) is for commercial property, funds are launched, investors lured, and properties bought, regardless. As soon as the mood changes, and investors want out, the funds either put a stop to that or reduce the value of the investor’s holding. You might not think there is anything wrong with that, but in my opinion, it shows a lack of foresight to buy on the mood of the moment because by then prices would have risen already.

6.7.3 Although property fund hype is that it is better to pool relatively small sums of money so as to afford more, (an approach that ensnares private investors hook-line-and-sinker) that view is only true when what the fund buys is worth buying. Generally, as I have said, what funds buy is rarely worth buying. Few institutional investors are shrewd: most are under the impression that because they are institutional they are better equipped to appraise propositions, but that is not necessarily so. At every entry point to the market, and in every price range, there are some that know what they are doing, and some that think they do, and plenty that really have no idea but don’t want to admit it.

6.7.4 In 1984, in my newsletter I quoted Hugh Jenkins of the National Coal Board Pension Fund saying of chartered surveyors “(they) will be continue to be regarded with cynicism, so far as their professional capabilities are concerned, as long as they cling to gut feeling about growth prospects without being able to back them up with fundamental research.” When I suggested the modern concept of professionalism removes initiative, several advisers on motivation and corporate strategy agreed with me. Gut-feeling is an essential ingredient in the evaluation of research. You can only draw conclusions from information if you can adopt a broad view. It is not the result of research which provides a span of information, but the questions gut-feeling invite you to ask. Furthermore, since many fund managers are comparatively young, with no real experience of the market long-term, let alone much if any experience of having started a business from scratch, they can suffer from over-reliance of what they are told and their interpretation. In other words, you are not actually investing in property through anyone that actually knows what they doing, so much as being led to believe they do!

6.7.5 Research minimises risk in the hope that, while short term deals may be lost, the long term might bring substantial reward. But limitations of research can bring their own problems. It is a feature of professionalism that the combination of knowledge and experience clashes with logic, except in cases of absolute certainty. If you have to invest, then you are going to become increasingly frustrated if your adviser’s research tells you not to buy, when all about you, others are busy spending and getting all the kudos and excitement, That does not make the advice wrong, since investment is a waiting game (which means it’s boring), but it does nothing for the sale of lucrative financial products, which is why funds overpay.

6.7.6 In a downturn, property funds are very good at blaming the state of the market, but the state of the property fund is a reflection of the attitudes and policies that drove the fund to buy the investments in the first place. What one has to realise, I suggest, is that just because property funds are managed by people that one would reasonably must surely know what they are doing doesn’t mean they do.

6.7.7 Having said all that I am not scathing of all property funds; I think there are some that are obviously have their wits about them. The question is whether you, whose money is wanted, are able to sort the wheat from the chaff.

6.8 - Pension Plan

6.8.1 A pension is a long-term commitment and tax relief is attractive, but setting-up fees and on-going charges for pension plans can be disproportionately high. I suggest thinking inside the box. The question to ask is: would the proposition be worth buying if there were no tax advantages? Many property investment schemes and plans are sold on tax advantages but unless the property itself makes sense as a long-term investment then I suggest the only likely advantage would be for the scheme promoter and manager of the plan.

6.8.2 Generally, commercial property is a depreciating asset. Since costs of buying (including Stamp Duty) and selling, and non-recoverable expenses during ownership, can be substantial, to get your money back, the value of the property must increase by enough to cover all those costs, plus loss of interest on your equity, plus adjustment for inflation, and allowing for tax on the gain. If, when you want to sell, the value has not increased by at least enough to cover all those costs and adjustments then you would either break-even, or be worse off.

6.8.3 There is a school of thought that treats property investment as an annuity. Provided the tenant is financially stable and likely to remain sound for the duration of the term of the tenancy, buying an investment for yield, regardless of the value of the asset may be lucrative. Even so, it is all too easy to overpay for income. Furthermore, unless the landlord’s interest is leasehold, (in which case the interest would probably revert to the freeholder on expiry (subject to any rights to renew or enfranchise), the property would revert to the landlord on expiry of the tenancy (subject to any rights of the tenant to renew) and any difficulties in reletting or otherwise disposing of the property could cause problems for the landlords.

6.8.4 For a SIPP (self-investment personal pension), generally buying a shop property investment for a pension based on tax advantages is not the best way to go about creating a pension. Unless the purchase is wholly a business-expense, in which case what I am about to say does not apply, the snag with buying property for investment because of the tax advantages can lead to the prospect of getting tax relief ignoring the prospects for the property as an investment itself.

6.8.5 I am sure there are many landlords that over the years since SIPPS were introduced in 2000 nowadays own properties that have fallen in value with no obvious likelihood of going back up to the price paid. Of course, when you are buying long-term, the occasional drop in value is only to be expected, but the question is whether any fall in value can be reasonably expected to be offset by any rise, or whether the ups-and-downs over the period of time simply cancel out each other.

6.8.6 Since most propositions are going to decline over the years, because of the principles of marketing, it is very much a matter of timing: the challenge is to sell and let someone else buy the slack before it becomes obvious that the investment is not going to perform. To some people, the idea of dumping on the unsuspecting might be thought anti-social, but when it’s your money you’re investing why stick around just in case?

6.8.7 The question is: long-term buy and hold, or long-term buy and lose?

6.9 - Tax and VAT

6.9.1 It is suggested that few surveyors understand tax and property and I am no exception, so I advise you to consult your accountant. The lack of understanding by surveyors, so I am told, is mainly to do with the legitimate ways to avoid and minimise liability.

6.9.2 Generally, investors own property in their own names, or a partnership (LLP) and/or through a limited company (LTD or PLC) and/or through a trust or charity.

6.9.3 In outline, as I understand, (also based on information on HMRC website), there are two types of tax applicable to property: income Tax and Capital Tax, and for each tax there are various allowances and means by which one can qualify for tax relief.

6.9.4 Income and Revenue comprises rent(s) and other receivables (amounts payable by the tenant) upon which there is some profit element.

6.9.5 Every individual has an annual income tax allowance. Income Tax rates vary according to taxable income bands.

6.9.6 Capital tax operates in several ways: Capital Gains Tax (CGT), InheritanceTax (IHT) replacing Capital Transfer Tax (CTT), Stamp Duty Land Tax (SDLT) and Capital Allowances

6.9.7 Capital Gains Tax is a tax on the profit or gain you make when you sell or otherwise ‘dispose of’ an asset. You usually dispose of an asset when you cease to own it: for example, if you sell it, give it away as a gift, transfer it to someone else or exchange it for something else.

6.9.8 (For a sole trader or a partner in a partnership and whose trade is in property, the sole/partner will pay Income Tax rather than Capital Gains Tax on any profits make when the property is sold or otherwise disposed of. That may include a one-off purchase and sale of a property. If the property trading business is carried on by a limited company - in which the person may be a director or shareholder - any profits on properties disposed of form part of the total profits of the company on which it pays Corporation Tax.)

6.9.9 For individuals, CGT is charged at a rate of 18%, or 28% for people paying more than the basic rate of income tax. Every individual has an annual capital gains tax allowance. Capital losses can be set against capital gains in other holdings before taxation.

6.9.10 For companies, chargeable gains are subject to corporation tax, and companies may claim an indexation allowance to offset the effect of inflation.

6.9.11 The valuation date for the calculation for CGT is either 31 March 1982 or the date of purchase, whichever the sooner, and the calculation based on the difference between the purchase price net of allowable costs at the date of purchase or the market value at 31 March 1982 whichever appropriate, and the proceeds net of allowance costs as at the date of sale. For IHT and probate, the valuation is the date of death, but IHT may be adjusted if the sale price within 6 months or so of the date of death differs from the value agreed for probate.

6.9.12 Agreeing the value for tax with HMRC is a three-stage process. In the first instance, I advise you to obtain a written report and valuation from an experienced surveyor. I am frequently instructed to provide CGT and probate valuations and my reports are accepted by HMRC. The report and valuation should accompanying the tax return: it is useful for the HMRC to read how the value has been arrived at. If HMRC accepts the value then the second and third stages would not apply and the matter can progress to tax computation. If not and the second stage arises, HMRC and the surveyor would consult and agree the market value. In my experience, a comprehensive report showing how the value has been arrived at, including information taken into account, is a sure way to avoid the second-stage or at least minimise the consequences. If the tax-payer has not obtained a surveyor’s report but simply entered a figure on the tax return then the risk of HMRC querying the figure is increased. In my experience, generally, where HMRC has queried the figure, an unrepresented tax-payer is unlikely to be as successful in reaching favourable agreement. The third-stage only applies if HMRC and the surveyor were unable to agree the market value, in which case the matter would be referred to a tax tribunal or court.

6.9.13 SDLT (replaces Stamp Duty) may become payable when all or part of an interest in land or property is transferred from one person to another if anything of monetary value is given in exchange. Anything of monetary value that is given in exchange for the property is referred to as the 'consideration'. This can be cash or another type of payment. It can also include the value of any outstanding mortgage that the buyer takes over. SDLT may be charged on the consideration.

6.9.14 SDLT may also be payable on the purchase price/lease premium of commercial property.

6.9.15 With a new lease, SDLT may be payable either on the amount of the premium or the amount of any rent due (over the term of the lease). Generally, on grant of lease, the tenant pays the SDLT. However, the effect of the amount of SDLT may figure in the negotiations.

6.9.16 Tax relief for capital allowances - plant and machinery, including landlord’s fixtures and fittings - requires specialist advice.

6.9.17 VAT

6.9.18 Land and buildings, such as freehold sales, leasing or renting, are normally exempt from Value Added Tax (VAT). (For VAT purposes, the definition of “land” includes buildings.)

6.9.19 It is possible to opt to tax a commercial property for VAT, in which case VAT would be added to the rent(s) and any VAT on allowable management expenses reclaimable.

6.9.20 It is not compulsory to opt to tax a commercial property for VAT, but if you do then you would have to keep proper accounting records to satisfy compliance with HMRC. Once registered, it is only possible to deregister after you have owned the property for at least 20 years. If you sell the property then the buyer can deregister if he wants.

6.9.21 Regardless of any VAT registration threshold (based on turnover), some types businesses are unable to recover part or all VAT on their business expenditure: for example, banks, betting offices, funeral directors. If you have a property let to a bank, it is generally better to not opt to tax the property because the tenant would otherwise not be able to recover all the VAT, which means the property would be more expensive to lease.

6.9.22 Residential property is normally exempt from VAT so if for example there is a flat above the shop but the whole of the property is let to the shop tenant then the landlord would have to apportion the amount of rent attributable to the flat and not charge VAT on that amount.

6.9.
23 You can find out more about opting to tax land and buildings by visiting HMRC website

7.0 - Investment Prospects

7.0.1 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 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). 

7.0.2 It does not follow that the price paid for the investment now is its market value. Although the test of market value is whether someone else would have paid the same price on the same date, investment is not about standing still, but growth. And growth involves looking into the future and predicting with a degree of accuracy.

7.0.3 When you consider prospects, growth can be elusive. Retailer demand for shops has been polarising for years, and the supply of tenants whose investment covenant would be considered 'capital-value increasing' is drying up. For example, in my newsletter, December 1984, I said:

"The historic development of shopping centres makes fascinating reading. Originally, as people went to market, so came permanent shops. In the post-war housing boom, shops started going to the people and even today, new council housing estates boast a block of shops.

The radical change in socio-economic patterns, and the real decline in the cost of transport, means that today, people go to the shops and the goodwill generated by the major operators in all sectors of the retailing market is sufficiently established to influence the prosperity of shopping centres.

When the idea of Brent Cross Shopping Centre, NW London, was conceived in 1959, it would probably not have been anything like as successful a concept that it is today. In the early 1960s, shopping development was confined to traditional shopping centres, and precincts, such as the Arndale Centres, were built on land fronting the High Street. The first suggestion that people might be persuaded to shop away from the traditional pitches was introduced when the second-generation food supermarkets, such as Tesco and Sainsbury's, started to move to fringe positions in order to provide on-site parking and loading facilities for their customers.

The need for food is the common link between all people. As it is a perishable product, with people having limited facilities for bulk storage, shopping for food is the main reason why most shopping centres attract daily pedestrian flow. If you take away the food shops, technically known as convenience traders, you also remove the spin-off for durable and service traders.

It is clear that the future of food retailing lies in the free-standing purpose-built supermarket located in an accessible position and offering excellent parking and loading facilities. The strength of buying power for and competition between the major operators means that retail prices are particularly keen. The independent grocer has seen his market share decline gradually since the 1950s and butchers, greengrocers, off-licences, fishmongers have all been hit hard. The ubiquitous confectioner, tobacconist, newsagent only survives because the major wholesalers of newspapers operate retail CTN outlets themselves. The private retailer with expansion ambition knows that the future for retailing must be to take units in busy positions, which are not completely dependent upon the whims and loyalties of local custom.

The importance that the presence of a food supermarket has on shopping positions is still underestimated. The closure by the Co-Op of many neighbourhood supermarkets has had a devastating effect on many local centres. Like cigarette brands, people are loyal to their favourite supermarket group and even if the old 'Tesco' is replaced by an individual grocer, offering the cliches of personal service and flexible opening hours, the damage is done. Local grocers won't survive for ever on people buying a pound of butter at 22:00 (10pm). The key to establishing some hold on the market is to contain costs, as there is always scope to participate in automatic local potential, especially as not everyone wants to shop at a superstore. In fact, the major groups are generally pleased that corner and local shops continue because they operate in different markets and, of course, it would be political suicide to admit to their extinction. However, the products are still the same and most shoppers are price conscious.

Top supermarket operators invest in research. They plan well-ahead and commitment to a development programme involving millions of pounds allows for the short term hurdles in favour of long term success. In the same way that the institutional and major landlords are actively selling secondary shops, so the major and multiple groups are actively vacating obsolete trading positions. Apart from the food groups, the other' enemies within' (so far as the secondary market is concerned) are the DIY, furniture and electrical groups, such as MFI, Harris Queensway, Payless, Texas Homecare, Do-It-All, Comet, B & Q, Homebase, etc, etc. Clamour for revision of the Sunday trading laws adds fuel to a fire which has already devastated the small retailer and is now creeping into the entire secondary centre.

In 1984, CBI-FT figures for Christmas trading predictions mention the local shop's expectations, for the first time. Any trip around secondary shopping centres that year would have indicated the noticeable absence of extra pedestrian flow. In my opinion, 1984 Christmas trading period will mark the beginning of the secondary trader's dread of this traditional time. In the past, all shopkeepers used to look forward to the seasonal upturn, but the rot started last year when shoppers spent a fortune in the High Streets and superstores and this year will prove no exception.

Supporters of the relaxation in Sunday trading laws claim more consumer choice and new jobs. But it is blatantly obvious that the small retailer will be squeezed out by the major operators. Important shopping areas, like Oxford Street, will benefit but the axe will fall on the rest. The new growth area for unemployed will be the self-employed retailer whose business is totally dependent upon pedestrian flow generated by the goodwill of others. Few local retailers actively market their stock; they are inter-dependent upon the collective benefit generated by being in a successful shopping centre and without the presence of national companies, generating national advertising and goodwill, there will be little incentive for local people to shop, except for the occasional item.

The future for the secondary shop will rest upon the retailer's personal ability as a retailer, highlighting the fact that few shop-keepers are retailers. The double glazing showrooms are a good example of a modern approach to retailing. They are shops for the visible storage of goods sold by the operator, through advertising and direct marketing. Too many shopkeepers have become complacent; they are used to people walking in automatically instead of actively attracting their interest.

If secondary centres do become the equivalent to an overcoat for shoppers - only needed when absolutely necessary - then the future expectations for investment growth must be limited. In establishing the future importance of a secondary centre, close attention should be paid to the size of the premises occupied by the supermarket operator to ensure it meets modern requirements and also upon the identity of the operator, as this defines the nature of the catchment area. It is important to monitor the locations in which the major operators take sites for their new stores. Most pop up in local and secondary areas because that is where land is most available. The benefit to the surrounding centres, however, will be dependent upon each individual retailer's ability to capitalise on the presence of the extra pedestrian flow by gearing his corporate image to the needs of the people.

Landlords have a role to play in maintaining the balance of trade in a secondary centre. On receipt of applications to change the user, the landlord should refuse consent if the proposed user appears to be in direct competition with established traders. It comes as a shock to many individual shopkeepers to be told that the rent for the premises is not calculated by reference to their ability to pay it. The level of rents in many secondary centres has already reached a peak at which, combined with the effect of rates, ever increasing overheads and declining revenue, they are now seriously affecting the stability of the centre.

Careful choice for investment is fast becoming essential. There will always be opportunities for growth, but a blanket assumption that all secondary areas will continue to prosper is a fallacy. I predict that investors who expect the percentage increases in rents applicable in the five year period from 1979 to 1984 to be repeated for the latter part of this decade are likely to be very disappointed despite the research!"

7.1 - ex-Growth

7.1.1 In the context of shop property for investment, the financial standing of a tenant at any time can affect investment performance.

7.1.2 The status of a limited company is either active, dormant, or dissolved and the prevailing status can be ascertained at Companies House on-line.

7.1.3 Where tenants are limited companies and especially where they subsidiaries of larger companies, it is increasingly common for the tenant whose name is on the lease to become a dormant company. Dormant companies used to be a tax-avoidance measure, (the loop-hole has been changed), but nowadays dormant companies are used to ring-fence the parent trading company from the liabilities under the lease.

7.1.4 A dormant company may have assets, and may become active at any time, and is entitled to claim tenancy renewal rights under the Landlord and Tenant Act 1954, (presupposing a qualifying tenancy), but the effect of the investment is to reduce the capital value because the landlord is unlikely to have any control over the tenant-company.

7.1.5 Although property costs (rent, business rates, etc) are often blamed, in practice, in my opinion, the majority of problems that befall retailers are self-inflicted through failure to address operational difficulties. Difficulties also arise where the trading location has improved, but the nature of the tenant’s business is out of kilter. Conversely, the trading position may have deteriorated, but the retailer’s mode of business, particularly on pricing, is not commensurate.

7.1.6 Where trading difficulties are caused by external events over which a retailer has no apparent control, such as severe weather conditions, the state of the economy, recession, and so on, such events are often cited as the cause of profit deterioration, but the fact that other retailers operating in the same sector of the market may be doing well, despite the same ostensibly adverse conditions, makes me think that ‘blaming’ such events is used as an excuse for the retailer’s own shortcomings.

7.1.7 The challenge, in times of change, as indeed at all times, is to always remain in sync with what customers want to buy. There are many reasons for being out of sync, for example:

• The retailer is not providing as good a service as it thinks
• The retailer is offering what it wants customers to want: not what people need.
• Directors have lost interest - particular common if just short of retirement age, or having made a pile cannot really be bothered!
• Directors are disillusioned - a feeling that indicates lack of sync with reality.
• The business is failing to deliver what it promises.
• The retailer’s staff have the wrong attitude for the customers in the reality that the business serves.
• There is insufficient demand or too much competition to run a profitable business.
• Cash-flow is poor and other business management skills are lacking.
• The business is not professional and forward-thinking in its outlook.
• The directors are more interested in helping themselves than helping others.
• The directors are not doing what is essentially true for them.

7.1.8 Although many retailers come unstuck in time of change, in practice it is not difficult to avoid that scenario. The main obstacle is that many retailers are resistant to change and will only do so when it is forced upon them, by which time it might be too late.

7.1.9 Retailers in trouble are managing to persuade landlords to accept rents paid monthly, a growing number of retailers not in any difficulty are expecting the same treatment.

7.1.10 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. 

7.1.11 In any event, such an arrangement, where it is a departure from 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.  However, care should be taken because any variation to the terms of the lease could affect privity of contract and any obligations of the guarantor. To avoid problems should the landlord want to sell the investment, the arrangement should be personal to the tenant and landlord and non-transferable. 

7.1.12 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. 

7.1.13 Multiple retailers, particularly, with premises that are surplus to requirements frequently sub-let, rather than assign the leases. There are many reasons. For example:

7.1.13.1) 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.] 

7.1.13.2) The financial standing of the assignee might not satisfy the freeholder's criteria. 

7.1.13.3) 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. 

7.1.13.4) 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. 

7.1.14 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.

7.1.15 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. 

7.1.16 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. 

7.1.17 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 underlessee/to-be-assignee is in no worse a position. 

7.1.18 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. 

7.1.19 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. 

7.1.20 In conclusion, the number of things to consider, together with the prospects for rental and capital growth generally, suggests that investment in shop property is not a step to be taken lightly.

For help and guidance at every step of the way, from deciding what to buy to asset management, you will find my experience, knowledge and skills invaluable.

To contact me, please email help@michaellever.co.uk or telephone 01531 631892

I look forward to helping you in some way.

Michael Lever
ML Guides - packed with information and free advice
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