Top ten tips for landlords - how to have the edge in a 'tenant led' market
01/04/2009
By Owen Walsh, Solicitor in Commercial Property & Development.
The downturn in the economy means that landlords face two major problems: an oversupply of available properties and existing tenants struggling or becoming insolvent.
This article offers some advice to landlords on how to minimise the risk of prospective tenants withdrawing from transactions, and what to do when an existing tenant is struggling to pay the rent.
1. Letting packs
Speed up the transaction by ensuring that you have an up-to-date letting pack ready for your lawyer to roll out as soon as the tenant agrees the heads of terms. It should include:
- Plans - a Land Registry compliant plan of each lettable unit, the building and if necessary the estate. Your lawyer and surveyor should be able to advise how to ensure a plan is Land Registry compliant. Visit the Land Registry's website and search for the document entitled lrpg040.pdf
- Title documents - ask your lawyer to review the title to the building and estate prior to any lettings. Any defects affecting the marketability of the units can then be rectified before the tenant finds out and withdraws from the transaction.
- Replies to standard enquiries - preparing replies to Commercial Property Standard Enquiries is the most common delaying factor to any transaction. Answer these at the first opportunity, and provide the following information - service charge accounts, insurance details, planning history, asbestos report, fire risk assessments, health & safety file.
- Energy Performance Certificates (EPCs) - you will now need these for almost all lettings. Consider obtaining an EPC for the whole building (which will usually be valid for ten years), to enable a copy to be produced for each letting.
- Form of lease - agree with your solicitor at an early date the form of standard lease to be used for each letting, which can then be updated to take account of the heads of terms. You can also save time and expense during negotiations with the tenant's lawyer if at the outset you indicate to your lawyer those amendments which you will accept.
2. Clear heads of terms
Unclear heads of terms can be a source of delay and, at worst, cause a break-down in the relationship between landlord and tenant before it has even begun. At Thomson Snell & Passmore, we are happy to advise on draft heads of terms in advance so that common pitfalls can be avoided.
A useful starting point is the British Property Federation's model heads of terms. Visit the British Property Federation's website, click on 'downloads' and print off the model heads of terms.
3. Flexibility
Consider offering a wider permitted use to allow the tenant to seek alternative business strategies to help it cope with a difficult market. For example, a retail tenant that is struggling may look to change its operations and diversify into the café/restaurant market.
Coupled with the wider use provision, consider also allowing a tenant to sub-let part of the property. This may provide a tenant with the additional income required to meet rent demands.
Be aware of the risks involved with the above approaches. Managing more than one tenant at a property could be more difficult, particularly if they have the ability to change the use of the property. Be sure to seek advice and maintain the value of your asset.
4. Rent-free periods
Protect your headline rent levels and consider offering longer rent-free periods to entice prospective tenants. Your surveyor can advise you on the marketability of your property, the area, and what period of rent-free should be offered.
Try to include contractual terms that any rent concessions are kept confidential, to protect your negotiating position with other current and potential tenants.
5. Break dates
Many tenants are now asking for shorter lease periods, with a break date on the first and/or second anniversary. Take your surveyor's advice when considering such a request. You may wish to offer a mutual break, so that you can take advantage of any upturn in the market in the next year or so.
6. Planning permission
Be aware of the tenant's proposed use of the property and consider the property's authorised use. The tenant may need to apply for planning permission for any proposed change. Such an application usually takes at least 8 weeks to be decided.
Ensure that the tenant applies to the local authority for consent to the change as early as possible. Get the tenant to enter into an agreement for lease to ensure they can't walk away from the deal whilst planning is being determined.
7. Monthly payments
It's well documented that struggling tenants have been asking to pay rent monthly rather than quarterly. Such requests should be carefully considered. We understand that most institutional landlords are reluctant to agree to such a request unless a tenant provides evidence that it is in danger of becoming insolvent.
If you do agree to such a request, take legal advice on how to document the change to the term of the lease. Great care needs to be taken to ensure that you do not waive your right to forfeit the lease, or prejudice your ability to enforce any guarantee agreements you might have with guarantors and/or previous tenants.
8. Guarantors or previous tenants
If your tenant is defaulting on rental payments, failing to comply with its obligations, or has gone into administration, consider enforcing the obligations of any guarantors or previous tenants. Your lawyer should be able to advise you on your options and how best to proceed.
9. Rent reviews
Traditionally, rent reviews take place at three or five year intervals. Consider shortening this period to enhance your ability to take advantage of any upturn in the market.
Resist any request for the review to be downwards as well as upwards. Consider other basis for rent review. For example, linking rent to the Retail Prices Index, or some other index might result in a higher rent being achieved than the standard "open market" review might.
10. Avoid business rates
If your tenant is in administration or receivership, and you are likely to have an empty property, ensure early and constant dialogue with the administrator or receiver. Do what you can to keep the lease running for as long as possible to avoid paying business rates while you search for a new tenant.
Conclusion
Ensure that you do all that you can to enhance the marketability of your properties. Well-maintained documentation and up-to-date information on each of your properties will help. If possible, keep a close eye on the financial performance of your current tenants.
Avoid rental voids and consider asking prospective tenants for guarantors, rent deposits, or both. Take legal advice approximately 9 months before a protected tenancy is due for renewal.
Maintaining dialogue with your lawyer and surveyor, and considering the above tips, will help to ensure that you have an effective plan for coping with the economic downturn. Thomson Snell & Passmore is committed to ensuring that our clients have the best strategy to cope with the downturn, emerge strongly and move forward when the upturn begins.