Landlords of commercial property often appear to their tenants as being callous, unhelpful and heartless, says a businessman’s guide to owner-occupation prepared by surveyors Boston Gilmore.(*) More and more tenants are coming to the market to buy their own premises, the firm says, and prices are affordable.
The market for rented accommodation over the last 20 years has largely been a landlord’s market with the result that leases have become increasingly favourable to the landlord. At the same time the financial institutions have invested enormous sums of money into property and have ensured that no opportunity has been missed to make tenants fully responsible for all the liabilities and costs relating to property. The process starts on day one when the new tenant is required to pay the landlord’s as well as his own legal costs for preparing the lease, Boston Gilmore point out. “Thereafter the tenants’ use of the premises, his ability to sublet and even assign, to alter or improve and whatever else the landlord can get away with, can all be restricted.”
Inflation and a landlord’s market have resulted in the introduction of rent reviews into leases. “Consequently, at three- or five-yearly intervals the rent is revised, usually on an upward-only basis to the new open market rental value of the property. At the best of times this can be difficult to estimate, but in a growth location, increases can be surprisingly high. A major element of uncertainty is thus introduced into the profitability of a business.
“Not only has the tenant to suffer the indignity of asking for permission to sell his lease, the landlord can demand various forms of surety and detailed information regarding the proposed assignee before granting licence to assign. Even when sold, the tenant is never completely off the hook until the end of the lease. He can still be sued if the next or subsequent tenant defaults.”
A freeholder, on the other hand, is his own master and can establish his own costs of occupancy. At the present time, yields on most commercial property are lower than the costs of borrowing, so that for the first few years the purchaser’s repayments are likely to be higher than the equivalent rent. However, if property rents, and therefore capital values, continue to rise it soon becomes more attractive to buy than to rent.
There has been a significant growth in the number of well-managed small businesses which require good-quality properties at affordable prices, Boston Gilmore say. Many firms resent the restrictions placed on them in large multi-occupied blocks. They require 24-hour access, control over heating and cleaning and exclusive use of parking areas, for example.
“Slowly, the more enterprising of property developers are spotting this gap in the market. Some attractive and successful developments are now available which take the form of a terrace or courtyard of small self-contained buildings. The advantage of this format, where the building is divided vertically, is that each occupier has his own front door. The psychological and practical effects for a small firm are immense. The restrictions of sharing a building do not exist and, equally important, the firm can create its own environment within the shell of the building. This enhances the importance of the occupier in the eyes of staff, competitors and, above all, clients and customers.”
In the main, these developments have been undertaken in carefully selected locations which may appeal to the owner-occupier, the booklet says, although they are not generally associated with the traditional central London location for business premises.
Developers are also turning their attention to the large office buildings of the 1960s and 1970s that are now becoming available as larger firms move out. These are being divided into floors for sale around a refurbished core. The principal is sound, Boston Gilmore conclude, and for many buyers the accommodation will be ideal.
(*) The pros and cons of owner-occupation Boston Gilmore, 138 Sloane Street, London SW1X 9AY.
