How Landlords can Safeguard Commercial Property Returns During Uncertain Times

Posted by Strettons on 28th October 2022 -

Our Managing Director and property management expert Simon Tilsiter shares insights into how active commercial property management can protect rental income and grow value during the cost-of-living crisis. 

Rent is key

With economic storm clouds continuing to take shape, property management experts – including Strettons – are on hand to advise commercial landlords how best to protect their assets. From early rent collection to regular inspections to monitor tenants' businesses, a keen eye for local rental and capital values will always ensure the best outcome.

Now that landlords can use Commercial Rent Arrears Recovery (CRAR) to its fullest, subtle nuances should be carefully and sensitively signposted to tenants and then enacted, if needed, to collect funds. Careful consideration of bankruptcy, winding up procedures and penalty measures can ensure funds are collected.

Ultimately a managing agent needs to know their market. They should be asking three important questions:

• Can a higher rent or better terms be secured if the tenant fails?
• Can rental problems experienced by a tenant be used to re-gear a lease (e.g. remove a break clause)?
• Is the property worth more if the tenant leaves? 

With economic problems ahead, a tenant in difficulty may welcome an opportunity for both parties to find a solution that's better suited to their current circumstances. Remarketing a property could unlock its potential. But the opposite may also be true, so landlords should seek regular advice from commercial agents who can report on market interest and position properties for reletting if needed.

Red tape

There is so much of it with more on the way. Successive governments may add burdens to landlords, but this usually unlocks opportunities to add value both in terms of the service offered to property management clients and the properties themselves. 

It's also important to know who is paying the rent. Your primary interest might be that the rent is being paid, but knowing who your payee is, on paper, is important too. Apart from the obligation for commercial landlords to comply with anti-money laundering legislation (over £10,000 pcm), they must also record who pays to ensure that covenant strength is not diluted. The last thing a landlord wants is to find that their blue chip tenant is no longer 'on the hook' to pay the rent. This could result in rent failure and a collapse of property value shortly after. 

Fire safety and health & safety are also often overlooked if a tenant has a full repairing lease – but landlords have a responsibility to ensure their tenants comply with legislation, so this should be high on the list of priorities, too. If both a tenant and landlord are negligent, insurance may be invalidated.

What's the use?

Use is value. Restrictions on a property's use restrict value – both rent and capital. But many landlords are missing a trick because alternative use can unlock value, too.

Consider an office floor that used to be a 'B1' use. The use is now class E, meaning that it can accommodate retail, office space or healthcare professionals. We manage an office block next to Heron Tower in the City. Recent refurbishment and marketing of a vacant floor attracted a dental practice. Dentists make excellent tenants as they rarely fail, always install valuable equipment (which they don't want to leave behind or move), generate goodwill and attract other users to the building. Often the use is the key and changing or expanding the use can secure a tenant in tough times.

Insurance policy

When you strip things back, there are some core building blocks to owning a property, and building insurance is often one of them. Making sure that a property is insured for the right amount is the first thing that any buyer should do – in fact, some sales won't complete without it. It doesn't just stop there; building insurance should be reviewed regularly to make sure the sum still reflects the value. This is perhaps even more important in the face of inflated prices and a sharp rise in demand for builders. 

The latest building cost index shows that reinstatement costs have risen by around 10%. Of course applying the correct building cost per square metre is only the start of the calculation. After factoring in demolition, site clearance, fees and contingencies, costs could be as much as 27% higher. 

If you haven't recently reviewed the amount your commercial properties are insured for, you should instruct a qualified building surveyor firm to prepare a reinstatement cost valuation. 

Mixing it up 

Some commercial portfolios consist of single properties let to one tenant on full repairing and insuring terms. Most portfolios, however, include properties in mixed usage. Consider the average shop on the High Street with retail on the ground floor and residential upper parts. A brand new development of offices might include retail on the ground floor with some leisure uses as well, and a new block of flats might also have shops and offices on the lower floors. 

The reality is that most portfolios have a mix of uses, and when there is a mix, there is usually conflict. If there isn't conflict, then there are often different rules and regimes that govern the various sectors. 

When you have a mixed use building that includes both residential and commercial tenants, the requirements of section 20 of the Landlord and Tenant Act 1985 kick in. This legislation ensures that long lessees are consulted on any major works. The landlord goes through a formal process to secure three quotations. Residents are able to comment on each and can nominate a contractor of choice should they so wish. This typically takes three to four months to arrange and failure to do so means a freeholder cannot recover costs over £250 per flat from the residents – a costly error if you are not on top of the legislation. Additionally, s20B of the same Act means that if you take too long to balance the service charge year, you can't recover some parts of the expense from your residents either.

As ever, the key to successful property management is to seek expert advice.

To find out how appointing a commercial managing agent could make your portfolio work harder for you, please get in touch. 

 

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