Although commercial premises can be an important asset for your business, it can also be expensive and challenging to manage. Thames Valley Property Law Firm of the Year, B P Collins, explores commercial landlords' main concerns, with suggestions on how best to navigate the tough landscape, protect investments and create more resilient leasing arrangements.
Top ten concerns
- Economic uncertainty: The broader economic environment remains uncertain, with inflationary pressures and the potential for interest rate hikes. This affects both the ability of tenants to pay rent and the increased costs landlords face in managing their properties.
- Vacancy rates: As businesses continue to adjust to hybrid and remote working models, the demand for office space has fluctuated. Landlords may struggle with high vacancy rates, particularly in older office buildings and with spaces which are difficult to adapt.
- Retail sector challenges: The retail sector has been under significant pressure, with many businesses closing or changing how they do business. The shift to online shopping has aggravated these issues, leading to increased vacancies and reduced rental income for retail property owners.
- Lease negotiations and rent reductions: Many tenants are seeking rent reductions or more flexible lease terms. Landlords must navigate these negotiations carefully to retain tenants while protecting their own financial interests.
- Regulatory changes: There have been changes in regulations concerning commercial property, including potential reforms to business rates and increased focus on energy efficiency and sustainability. Landlords must stay compliant with these regulations, which can involve significant cost and administrative burden.
- Debt and financing: With higher interest rates, refinancing existing loans can become more expensive. Landlords with high levels of debt might face challenges in managing their cash flow and meeting their financial obligations.
- Maintenance and upgrades: To attract and retain tenants, many landlords need to invest in modernising their properties. This includes making properties more energy-efficient and incorporating the latest tech, which can be costly.
- Insurance costs: Rising insurance premiums, particularly for properties in certain risk areas or those requiring significant refurbishment or building work, can add to the financial burdens faced by landlords.
- Tenant insolvency: With economic pressures, there is a risk of tenant insolvencies, leading to loss of income and the potential for legal disputes over lease obligations.
- Competition: Increased competition from new developments and alternative property uses (such as converting commercial properties to residential use) can impact rental prices and occupancy rates.
There are various legal strategies that may be employed to help mitigate risk and provide more stability. For example:
Lease negotiation clauses: Include flexible break clauses which permit landlords to terminate leases early should they require flexibility to be able to get the premises back for redevelopment or refurbishment. Consider including rent review clauses that allow for regular adjustments based on market conditions or inflation indices. This can help align rental income with current market conditions.
Flexible leasing structures: Offer shorter lease terms with options to renew, which can attract tenants who are uncertain about long-term commitments. Or adapt spaces to reflect the popularity of co-working models and offer flexible terms, which could attract a wide range of tenants.
Tenant support: Legal agreements to defer rent or offer temporary rent reductions can help retain tenants facing short-term difficulties. Consider providing allowances for tenants to improve their space, which can make properties more attractive and more bespoke to their needs.
Due diligence: Be sure to conduct thorough credit checks and request guarantees to mitigate the risk of tenant insolvency. Obtain higher security deposits to cover potential defaults.
Mediation: If a dispute arises, it is worth considering mediation, which is more cost effective and can take less time to reach a solution, than going through the courts.
Property maintenance: Clearly define service charges and maintenance responsibilities in leases to ensure tenants contribute to property upkeep.
Legislation compliance: Keep abreast of legislative changes and ensure compliance with all new regulations affecting commercial properties.
Property usage: Consider converting underutilised commercial properties into mixed-use developments that combine residential, retail, and office spaces or explore options for redeveloping or repurposing properties to meet current market demands.
Looking ahead
A consultation on the Landlord and Tenant Act 1954 by the Law Commission is expected to take place this year. This could impact a range of matters including the continuation of commercial leases following the expiry of the contractual term and a tenant's right to a new lease; ensuring commercial properties are in use to revamp high streets and town centres; the basis on which a landlord can seek to end a commercial lease; plus the court's procedures and considerations when deciding the terms of a new commercial lease.
The wider impact of the Building Safety Act 2022 remains to be seen particularly around the increased duties for a freeholder or building owner to alleviate safety risks throughout a project. The full impact of the legislation is likely to develop over the next few months, as the courts interpret the Act.
The commercial property sector is becoming increasingly committed to being environmentally friendly. As a result, there is likely to be a rise in the use of "Green Leases" in real estate, which encourages landlords and tenants to work together to reduce the impact the property has on the environment.
Through the Minimum Energy Efficiency Standards (MEES), commercial landlords now have until 2028 to meet the requirement of achieving an Energy Performance Certificate (EPC) rating of C for their properties. However, it is advisable for landlords to upgrade their energy efficiency practices sooner rather than later, to not only meet the EPC rating but also to increase the overall appeal and market value of their properties.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.