With a vast number of scheduled rent payments not being made on the last quarter day, many landlords’ positions are looking precarious.

There will be a large number of negotiations and discussions between landlords and their tenants around rent deferrals and holidays for tenants whose businesses may have been forced to shut down entirely for the duration of the lockdown (and possibly beyond if social distancing renders the business unviable). 

There will be natural caution by landlords when they receive a request from their tenant – are they at serious risk of insolvency or taking advantage of the current climate?  There are also points of principle at play around the spread of risk and associated costs between commercial enterprise and their suppliers (in this case property investors).  While the law around leases are clear in this respect, a more fundamental pragmatic and commercial approach may be necessary to retaining an otherwise viable tenant with temporary disruption, than losing the tenant to the administrators and resulting void costs in a depressed market.

Below we look at some of the main issues for commercial landlords looking to protect their investments during this pandemic and resulting economic fall-out:

Short-term Support of the Rent Roll

In the landlord and tenant relationship economic risk and the success or otherwise of the tenant’s business is very much their responsibility.  It is also the tenant who is likely to be taking advantage of government furlough, grants and loan schemes, off-setting their operational losses.  The landlord is not currently getting any government compensation or support for reduced rental income.

However, regardless of moral hazard, by going into administration a tenant will be lumbering the landlord with no rent or service charge contributions, business rates and outstanding dilapidations to resolve.  The landlord is then in an unenviable position of re-letting the space in a potentially depressed market.  Against this backdrop, landlords will need to look at their investment model and potentially engage with tenants to protect their longer-term interests.

The landlord’s ability to support their tenants will vary depending on any mortgage commitments and ability to negotiate holidays from the lenders as well as what else they rely on the rental income to fund.

However, some landlords may be happier to lose the tenant if they consider that they can get a new tenant with a better covenant on agreeable terms.  Ultimately it is up to each landlord to look at the bigger picture, review their investment model and set the course they feel will be to their advantage.  

Protecting Value

Following any engagement with the tenant, the landlord should want to maintain the capital value, even at the expense of short-term disruption to income.  Given that value of commercial investment property is primarily driven by rental income and yield, it is important for a landlord not to tie themselves into a permanently reduced income by reducing the current rental amount or re-letting in the market at a significantly lower rent and/ or to a tenant with a poorer covenant.  

Capital Improvements

Investors in property with significant asset management potential may consider this an opportune time to carry out enhancements to their assets by extending or modernising the property with a view to re-letting at a premium later, particularly if the crisis has resulted in a higher vacancy rate.    

It is also likely that construction costs and rental values will dip during the upcoming downturn so any capital improvement carried out during this time may ride the trough of reduced costs and re-letting in on the wave of a rising market.  However, the availability and terms of financing may limit the property investors’ ability to take full advantage.   

The market is likely to undergo a profound and permanent shift through this crisis with different sectors impacted in diverse ways and market demand will likely to evolve with it.  Landlords would be expecting to study market trends with a view to adapting their assets to optimise their value.  This can be through changing the use to meet demand in a particular sector, possibly to one less likely to be impacted by any shutdowns or altering space and amenities to meet changing tenant demands, such as additional storage/ warehousing capability or to ease the implementation of social distancing measures.        

Whatever the scenario, the current crisis and economic impact will require dynamic and innovative asset management in the short- and longer-terms to mitigate the immediate disruption and position the asset to meet the future market demands.   

If you feel these services would benefit you or your organisation, please contact us or call on 0207 947 4 947 or 01638 596 241.

All businesses and organisations have been facing significant challenges since the advent of COVID 19 with travel restrictions, supply-chain disruption, government-imposed lockdowns and suppressed demand for their goods and services. Different sectors are faring better than others, with leisure, travel and hospitality virtually shutting down while essential industries such as supermarkets doing comparatively well. 

For many businesses, already teetering on the edge, the economic shutdown and the almost certain upcoming recession will prove terminal.  However, many perfectly viable and sustainable businesses during normal times may have to take drastic action to stave off the administrators.

Property invariably comprises a significant part of an organisation’s outgoings and they will be considering ways to mitigate business disruption in the short-term and look at a longer-term strategy to adapt to the changing market.

Below is a brief look at the challenges facing occupiers and the short-term tactics to mitigate those issues as well as a longer-term view of the property market.

Short-term Survival

The immediate and most distressing impact of the pandemic is the sudden stop of much of the economy and forced cessation of many business activities, leaving many businesses unable to trade and raise the income to pay staff and suppliers.  When extrapolated across the economy it is anticipated that the economy will shrink 35%, unheard of previously.

Businesses that are still trading are suffering considerably from supply chain disruption and particularly from imported goods, and seeing business slow down as their customers conserve cash.  This has led to many rapidly changing their business models to reflect a changed market. 

Although the restrictions are slowly easing, the unknown length of this crisis with the likely recessionary impact and radically altered fiscal landscape makes planning for the future difficult. However, the immediate considerations for business tenants will include:

Rent Holidays/ Deferrals

Even with employee furlough schemes, grants and business rates holidays if there is no income then there is nothing to pay rent with.  While it is unlikely that the lease has any specific provisions allowing for rent deferrals or holidays, many landlords would be reluctant to lose, what would otherwise be a good tenant, and see their medium-term income fall along with the capital value of their asset.

Pragmatic landlords’ reluctance to lose tenants would make them open to discussing support measures with their tenants, but it is important for the tenant to be able to assess the landlord’s position and ability to strike a deal.

Exiting Current Lease

Some occupiers that have reached or approaching the end of their lease term may wish to serve notice and vacate the property, with a view to moving to new premises.  Moving premises can be a costly and disruptive process but outgoing tenants should be mindful of their dilapidations liability that will be realised by terminating the lease. 

Dilapidations are essentially the works that an out-going tenant will need to undertake which typically include reinstatement of any fit-out and alterations back to the original condition, remedying any disrepairs and redecorating the premises.  Failure to do so can result in a claim from the landlord for the costs of those works and consequential losses such as loss of rent for the time taken to put the property back into the condition required by the lease.     

If an occupier is looking to exercise a break clause, they should be mindful of conditions attached to that break including ensuring that there are no outstanding dilapidations on the break date and the tenant is not in any other breach of the lease, such as failure to pay all rent up to date.

Assignment or Sub-Letting

If an occupier is mid-term does not want to negotiate an early determination of the lease, they can consider assigning or sub-letting all or part of the property.  This will require the tenant to find their own sub-tenant or assignee and have the landlord agree to them.  In the case of assigning or sub-letting part of the property, the tenant may have to carry out alterations to divide the space as necessary, with the landlord’s approval and ultimately reinstate at the end of the lease term.

Opportunities in the Longer Term

Many occupiers will be considering longer-term property restructuring which may include:

Acceleration of the Remote Working Trend  

Which in turn reduces the amount of space required and possibly allow an occupier to rent property on a more flexible and adaptable basis.

Mitigation of future supply chain disruption

Increasing stockpiling of goods and components with less reliance on the “just in time” model, which could be attained by expanding existing premises or acquiring additional warehouse/ storage units.

Relocating to better-value premises

The crisis has led to a record amount of commercial property returning to the leasing market as businesses either rapidly downsize or go into administration.  This will provide a great opportunity for some occupiers to relocate to new premises better reflecting their business requirements and on more advantageous terms.

Refocus Online

While ecommerce is not a new concept, we expect retailers to accelerate the ongoing transition from the high street to online with the resulting shrinking of their physical presence and demand on to warehousing and fulfilment centres.

Modification and Enhancement of existing premises

This could be driven by a number of factors such as the realignment of operational conditions and processes, need to hold more stock, changes in workplace habits or consumer needs.  Organisations with deeper reserves may also use this down time to undertake significant refurbishment or capital projects and taking advantage of a potentially depressed construction market.  

If you feel these services would benefit you or your organisation, please contact us or call on 0207 947 4 947 or 01638 596 241.

We are very pleased to announce that Doyen Land have been accredited by ConstructionLine and now hold Gold Membership. This has been a challenging process but we are finally there.

At Doyen Land we can assist clients in all aspects of commercial property advisory and now ConstructionLine buyers can easily include us in their procurement process. 

If you feel these services would benefit you or your organisation, please contact us or call on 0207 947 4 947 or 01638 596 241.

Lease negotiations for new business premises are complex, after negotiating rent, term, break clauses and rent reviews, the fit-out and other alterations are often side-lined until after the lease is agreed; at this point the leverage is gone.

Getting early fit-out advice before execution of the lease allows an in-coming tenant to fully engage in lease negotiations factoring in the time, cost and any works they want the landlord to carry out while they have the leverage.  This approach also saves time in getting Contractors on site to carry out the works ready for the tenant’s occupation. 

Often we come across Client’s who execute a lease and then realise belatedly that fit-out works take longer to design and procure than originally thought and that they require the landlord to upgrade building services or make changes to the access arrangements.   Dealing with these issues causes costly delays and without the urgency of the landlord to accommodate them. 

We can assist clients in all aspects of lease negotiations from commercial to technical matters.

If you feel these services would benefit you or your organisation, please contact us or call on 0207 947 4 947 or 01638 596 241.

EXTRACTED FROM: RICS professional standards and guidance, UK, Surveying assets in the built environment – 1st edition, March 2017

…There are many types of survey that are common to the various market sectors. The surveyor tasked with a survey in a particular sector should consider the following aspects to ensure their survey meets the requirements of the agreed client brief and that the desired output will be obtained. Many of the sections may form only part of a larger commissioned piece of work to be incorporated into the survey in addition to any specialist surveys.

3.1.1 Types of assessment for consideration

An assessment of assets can include many types of survey, including, but not limited to:

• Technical Due Diligence, see Building surveys and technical due diligence guidance note at www.rics.org/
uk/knowledge/professional-guidance/guidance-notes/building-surveys-and-technical-due-diligence-of commercial-property/
• Building Reinstatement Cost Assessment (BRCA).
• Fire Risk Assessments (FRA).
• Dilapidations, see Dilapidations in England and Wales guidance note at www.rics.org/uk/knowledge/
professional-guidance/guidance-notes/dilapidations7th-edition/
• Building Services.
• Party Wall Awards.

• Equality Act.

3.3 Other aspects
In addition, the surveyor is often required to produce surveys incorporating the following:

3.3.1 Planned Preventive Maintenance policies (PPM)
To assess the maintenance requirements of an asset over an agreed period of time (these can range from up to 5 years and over 30 year cost projection) in order to enable a budget to be set and a structured plan for maintenance to be developed and implemented. Often derived from an asset register, the O&Ms (operation
and maintenance manuals) and from a survey, a PPM strategy of cyclic and periodic maintenance is produced
and prioritised to provide information on a year on year projected expenditure. To help minimise unexpected failure, clients and operators like to have predictable and stable year on year expenditure.

3.3.2 Elemental life cycle cost planning/Long Term Asset Replacement (LTAR)

LTAR is the evaluation of asset components to assess their individual life cycle and future replacement. This
contributes to the overall costed profile of the asset to be assessed as a budgeting tool for asset replacement.

3.3.3 Pre-acquisition, securitisation and valuation surveys

This is a detailed survey of the asset to determine its suitability to purchase as a standing investment when
acquiring as a freehold or leasehold interest. It can be used to fully assess the condition of a building or demise and any potential, current and future liabilities. It can also be linked to the repairing and lease termination liabilities or as part of a revaluation exercise. To confirm the existence of an asset, its location, function, age and general condition must be presented to enable a purchaser, lessee or funder to assess the value and suitability of purpose. This type of survey is often geared to the financial requirements of property funding, mainly for lending organisations and funders.

3.3.4 Tenant fit out and alterations
These are surveys carried out for the benefit of tenants, often accompanied by a condition survey, to inform the occupier’s future needs within their demise.

3.3.5 Schedule of Condition
A survey to record the current condition of an existing asset as evidence of the state of repair, etc. for future reference should a dispute arise.

3.3.6 Lease and warranty compliance
A survey to assess if a tenant is undertaking a regime of maintenance and repair in accordance with the lease and to ensure warranties are maintained. Often centred around schedules of dilapidations.

3.3.7 Estate assets
Many buildings, particularly commercial, healthcare, hospital and education environments are surrounded by an estate or may have areas of public realm. It is notable that many of the hard and soft finishes, street furniture, estate lighting, public artwork and water features are bespoke one-off components of high quality and value. This information should be available from the client estate terrier defining ownership of assets. While many clients are aware of their responsibility for the upkeep of these assets, the cost associated with
these should be included in any report as they can attract significant cost. This may also encompass areas such as loading bays, yards, service and un-adopted roadways.

3.4 Specialist surveys
A brief may also require the appointment of a specialist consultant. Specialist consultancy services will include
building services, the advice of structural engineers and any specialists where there is a need for intrusive surveys of the existing fabric. These specialisms are sometimes considered outside the expertise of the building surveyor, therefore separate appointments may be needed. These appointments often form a subcontractual relationship with the building surveyor. It is important that the surveyor ensures the contents of the specialist report are compatible with other service deliverables.

3.4.1 Building services
Mechanical, electrical, above and below ground services can form a significant part of the asset and therefore the survey and report. The building surveyor should consider the appointment of these specialists in a timely manner and provide a full and clear brief.

• Structural engineers: to advise as appropriate on
structural matters.
• Acoustic engineers: to advise as appropriate on
acoustic matters.
• Energy performance certificates: the assessment of energy performance of the existing asset.
• Accessibility: to advise on the provisions of the Equality Act.
• Environmental assessment: assessment of future and current environmental impact of asset/oblique area.
• Estate security: surveyors are often instructed in matters of security on an estate or public realm. There
are regulations governing the recording and viewing of CCTV images and the siting of cameras. The surveyor should be familiar with these regulations. Advice regarding active security measures may be relevant on certain high profile sites. For example HVM (Hostile Vehicle Mitigation) can be obtained by reference to CTSA (Counter Terrorism Security Advice) publications. It should be noted that many of the requirements for
CTSA fall under PAS (Publicly Available Specification). These specifications refer to the standard of a piece
of equipment to be installed and the method of installation. There is also a list of accredited RSES (Registered Security Engineering Specialist) who can warrant PAS installations. The surveyor should seek counter terrorism advice when considering this type of security.
• Hazardous material survey: primarily for consideration of asbestos and other deleterious materials. HSE 264
Asbestos guidance refers to two survey types:
– management survey and
– refurbishment and demolition survey.
• UKAS accredited or ABICS certified surveyors should be employed to undertake these surveys….

Doyen Land provides Clients with a full range of building consultancy services on all types of real estate assets.  If you feel this would help your organisation please do not hesitate to contact us.