A Tenants’ Market?

by Katie Moreton

Despite the devastating decline in business confidence and the dramatic downturn in the property market, for some the increase in ‘to let’ boards should be viewed with optimism. Until the onset of the property market price correction in June 2007, it had generally been accepted that landlords had command of the leasehold market. However, the downturn in the commercial property market in particular now means that there are greater opportunities for tenants looking to move premises, renew an existing lease or renegotiate rents.

According to the Royal Institution of Chartered Surveyors tenant demand for commercial property has eased back for the fourth consecutive quarter, particularly in the office sector, with rents expected to fall by 10% in 2009 and a further 6% in 2010. The office and retail markets seem set to be hit the hardest with many shops on the High Street already standing vacant.

In order to attract potential tenants over the coming months and possibly even years, landlords will need to consider accommodating the needs of prospective tenants by offering incentives and making their leases less restrictive and one-sided

Lease

Most of the usual lease terms are open for negotiation by tenants and their advisers and, clearly, in the current market conditions, tenants should drive as hard a bargain as they can, such as: -

* Rent

Tenants should argue for lower levels of rents and/or rent free periods to allow them sufficient time to cover any fit out period and the cost of fitting out.

* Rent Reviews

While upwards only rent reviews still seem to dominate the leasehold market, tenants should seek to negotiate alternatives such as upward or downward reviews, or possibly longer intervals between review dates. In many cases, however, the best result for a tenant is a shorter lease with no rent review, since this gives the tenant the greater flexibility of being able to walk away at the end of the lease while the economy is in an uncertain state.

* Repair

Tenants should try to limit repairing liabilities so that their obligations are appropriate to the term and to the state of the property.
  
* Break clauses

Landlords often try to impose conditions on tenants’ break options. The only conditions that tenants will wish to accept are that the rent is paid up to date and that vacant possession is given on the break date.

* Term
  
Some tenants will prefer the security of a longer term while others the flexibility of a shorter term. This will depend on the tenant’s needs and nature of their business. In an uncertain economic state a tenant’s best interest is usually in a short term which enjoys the security of tenure mentioned below.
 
* Security of Tenure

Many landlords now seek to exclude the tenant’s legal right under the Landlord and Tenant Act 1954 to renew the lease at the end of the term, although any prospective tenant is not obliged to accept this and can try to negotiate this point. There will, for the foreseeable future, be a good supply of alternative premises if a landlord is intransigent on this point.

Energy Performance Certificates

Energy Performance Certificates, which demonstrate the energy performance and efficiency rating, must now be provided by landlords to prospective tenants of all non domestic premises. The Certificate is accompanied by a recommendation report which provides the landlord with suggestions for cost effective improvements that can be made to improve the energy rating of the property.

Tenants are therefore able to compare energy ratings of potential premises and while there is no obligation on landlords to take any action in respect of the report, by implementing the proposed improvements, landlords can make their property more appealing to prospective tenants’, who may expect to benefit from increased energy efficiency and reduced fuel costs.

On the other hand, if landlords decide not to implement to proposed changes, tenants may be able to argue for lower rents on premises which have a poor rating.

Business Rates

Due to recent changes in the Empty Rates legislation, landlords must now pay full business rates on empty non-domestic premises after an initial period of either 3 or 6 months relief, depending on the nature of the property. The idea behind the change was to increase the supply of commercial property and make occupation more affordable for businesses.

Tenants need to be aware of this when negotiating lease terms, particularly if the property has been vacant for some time. At the same time, landlords should bear in mind the potential costs they face if an agreement with a potential tenant cannot be reached.

In conclusion, the key is flexibility. There is no doubt that the commercial property market has taken a severe turn for the worse in recent months and in view of the current market conditions, commercial tenants need to be even more aware of the implications of signing a lease without having firstly negotiated the terms or having taken advice. However, it is not all bad news for landlords as businesses, particularly new businesses, continue to struggle to secure finance. More often than not, renting is the only option to new and small businesses who might otherwise have been keen to buy their premises. However, landlords will be only too aware that there is keen competition for premises.

Katie Moreton is a trainee solicitor in Burnetts’ commercial property team. For further advice or information on leasing commercial property, contact Katie on 01228 522222 .