Previously, Mainly for Students set out a scenario of a lease renewal, with the surveyor acting for a landlord. This was presented in part as a series of tasks with the possible answers provided on EGi.
For this edition you are asked to explore the same scenario but this time acting as if instructed by the tenant. Before reading the following, read back and refresh yourself of the situation in the last edition.
Answers to the questions are provided below.
Facts
The lease expired in summer 2017 and no notices or communication have been received from the landlord. The lease is within the Landlord and Tenant Act 1954, so your client has security of tenure.
The initial tenant meeting
In your initial meeting, you explore the tenant’s key questions and challenges as regards the following:
■ Is the property still fit for purpose, in terms of size, location and profitability? If the property is no longer suitable, can an acceptable relocation option be found (and can this be secured on the right terms and within the desired timescale?)
■ If the property remains fit for purpose, how can an agreement to renew on the most favourable terms (ie maximum flexibility and minimal outgoings) be sought?
■ The extent to which the tenant might decide to refit the property if a new lease is agreed. What incentives might be gained from the landlord?
■ Minimising any possible litigation costs involved with the lease renewal.
■ How to deal with the poor decorative order and moderate dilapidations liability in the most cost effective manner.
Questions and answers
Questions
Question 1
After the meeting, secure your instructions in writing before proceeding – including your agreed fee level. What would you do next?
Question 2
Would you ask for any other information at this stage?
You then arrange to inspect and measure the property in line with RICS Property Measurement (2nd ed, 2018). You assess any health & safety risks before attending the site in line with RICS Surveying Safely (1st ed, 2011) and make access arrangements with your client. On site, you use a laser distance meter to measure the unit and inspect the surrounding area, external and then internal parts of the subject unit. You note that the property is in a poor state of repair, with a water leak to the rear store-room.
On your return to the office, you collate your information into your lease renewal report, including comparable evidence you have verified with other agents. You issue your report to the tenant with the following recommendations:
■ You have assessed current open market value (on the basis of the statutory section 34 hypothetical lease terms) to be £220,000pa – an uplift of £20,000pa. The open market evidence suggests that a 10-year lease with a five-year tenant’s break is the norm. This is an excepted valuation under the Red Book as it is for negotiation purposes.
■ You advise that an unconditional break is desirable to avoid the option becoming contentious or impossible to operate. You also recommend seeking an upward/downward rent review in line with the recommendations of the Code for Leasing Business Premises in England & Wales.
■ You recommend that your client seeks a service charge cap in the new lease and that the service charge should be managed in line with the 2014 RICS Code of Practice (Service Charges in Commercial Property, 3rd ed).
■ You also recommend the draft lease is reviewed carefully by both you and the client’s lawyer, to ensure that the lease terms are reasonable and provide sufficient flexibility.
■ EPC rating of E: this means that the property does not currently fall within the scope of improvements within the Minimum Energy Efficiency Standards. However, you advise your client that the terms of any new lease will need to be carefully considered to ensure that the landlord does not try to pass the cost liability for any improvements works to them.
■ The poor condition and water leak could fall within your client’s dilapidations liability, so you recommend they take further advice from a building surveyor. You also recommend that they take immediate advice in relation to the leak, firstly to establish whose liability it is and then to arrange remedial works to avoid further damage and potential disruption to their operations.
In relation to the property’s fitness for purpose, you make the following observations:
■ You speak to the client who confirms that the property is profitable, although it is slightly too small for their current operational requirements. This is particularly the case for back of house storage.
■ The retail market in this city is performing well, with a limited supply of prime units and healthy tenant demand from established and new market entrants. In particular, a new anchor occupier has opened on the opposite side of the street from the subject unit. Your client likes the location and you both consider it is optimal for the business.
■ The cost to relocate and fit out a new unit would be substantial, so you recommend seeking to renew the existing lease while exploring options for remote storage space. You also recommend seeking to agree an additional rent-free period/capital contribution for your client to refit the property, which may help to minimise the dilapidations issues.
Question 3
Your client considers your advice and instructs you to proceed with the renewal negotiation. What tactics would you apply to secure the best settlement and resolution of issues facing your client?
What next? You open negotiations with the landlord and establish that they are initially seeking a substantial uplift to £250,000pa on the basis of a 10-year straight new lease. They are also threatening to serve a schedule of dilapidations to require your client to undertake the required works.
You suggest a meeting with the landlord’s agent and their client to explore your client’s objectives for the site. You explain they will consider refitting the property if a new lease is agreed on acceptable terms. Your client has an excellent covenant and the landlord is keen to retain their future occupation, although they are insisting on a rental uplift to reflect the market tone.
The parties eventually agree to a new 10-year lease with an unconditional tenant’s break in year five at £220,000pa. The landlord agrees to grant a six-month rent-free period to cover your client’s refitting costs, if they are able to agree to deal with the dilapidations issues. You consider this reflects a favourable settlement and recommend your client proceeds.
Question 4
What other tactics could you have considered using if the parties didn’t agree on the new lease terms and rent?
What would happen next? The parties should agree the details of the renewal in heads of terms, which are then circulated to solicitors. The parties’ solicitors then formulate the draft lease, which completes four months later.
What should you do when the lease completes?
■ Issue your fee account in line with your terms of engagement;
■ Put your file in good order for archiving;
■ Diarise the next rent review date for business generation purposes;
■ Thank the client for their business;
■ Create a comparable evidence sheet to hold on file;
■ Provide any information required by the client’s building surveyor and fit out contractor; and
■ Confirm the new lease terms and rent start date to your client’s management team. This includes details of the rent-free period to ensure that it is paid by the landlord.
Did you achieve your client’s objectives?
■ Consider whether the property remains fit for purpose, in terms of size, location and profitability – yes.
■ If the property remains fit for purpose, you will need to agree a renewal on the most favourable terms – yes, acceptable terms agreed with flexibility and a market rent.
■ The tenant may also decide to refit if a new lease is agreed, they want an incentive to do so from the landlord. Yes – six months secured.
■ Minimise litigation costs with the lease renewal. Yes – no notices served.
■ Deal with the poor decorative order and moderate dilapidations liability in the most cost effective manner. Yes – covered within the rent free above.
Answers
Question 1
- Check you are both competent to act, eg, sufficient knowledge, skill and experience of dealing with similar properties in the area. Answer: yes.
- Check for conflicts of interest in line with RICS Professional Statement Conflicts of Interest, Global, (1st ed, 2018), eg, e-mail around firms and check instruction database. Answer: none exist.
- Issue terms of engagement for signature by your client, including your fee proposal and any other relevant clauses. Answer: signed copy returned and held on file.
Question 2
Yes, the next step would be to ask for the following desktop due diligence information, eg, copy lease and other deeds/legal documents, floor plans, historic file information, EPC (or check the non-domestic EPC register if your client does not have a copy), any relevant health and safety information, access arrangements and asbestos report.
This would be supplemented with your own desktop research, eg, comparable evidence, surrounding uses, information on the city centre and any wider redevelopment proposals and general retail market analysis.
Question 3
Tactically, you recommend opening negotiations with the landlord’s agent to try to secure the above objectives. Given the potential uplift in rent, you do not recommend serving a section 26 notice as this would give rise to an interim rent liability. In any case, by negotiating a new lease it will allow you to build in your client’s specific objectives while minimising the associated litigation costs. Your client is entitled to hold over until notice is served by either party, so they are not at risk of losing security of tenure.
Question 4
These might include:
a) A Part 36 offer giving strict timescales and setting out cost implications.
b) A Calderbank offer giving more flexibility in timings and cost implications.
c) Wait for the landlord to serve a section 25 notice to delay interim rent at a higher level becoming payable.
d) Continue monitoring relocation options in the event that a new opportunity might arise.
Key skills for a lease consultancy/landlord and tenant surveyor
■ Good communication skills – understanding your client’s objectives, listening carefully and writing complex reports giving reasoned advice;
■ Excellent negotiation skills to reach the desired settlement;
■ Technical knowledge to negotiate effectively and use the process to drive matters forward;
■ Attention to detail to ensure accuracy; and
■ Strategic logical thinking to assess the most practical way to reach a negotiated settlement.
Jen Lemen BSc (Hons) MRICS is a property consultant, academic and owner of Property Elite. Mainly for Students is edited by Paul Collins of Nottingham Trent University. He is also an external examiner at other universities and an RICS APC assessor. He welcomes suggestions for the column and can be contacted at paul.collins@ntu.ac.uk
