The Following article was first published on newbusiness.co.uk and can be found in it’s entirety here.

Top tips for renegotiating your lease

Your lease expires later this year.  You know or suspect that you are paying too much rent or that there are better deals to be had elsewhere.  Either you want to stay put, as location is key to your success, or relocating would be a hassle and expense which you could simply do without.

Your chances of negotiating a lower rent and/or more favourable lease terms will be greatly enhanced if you go to your landlord well informed and armed with a list of alternative premises and comparables.  You could seek advice from a local, experienced surveyor and/or if you have good relationships with nearby occupiers, see if they will discuss their lease terms with you.  The more empty property your landlord has, the better still the deal you could strike.  From April, landlords will pay business rates on all vacant properties with a rateable value of more than £2,600, so voids will be even more costly for landlords.

Whilst the initial yearly rent and length of term are likely to be the first points which you and the landlord focus on, your liability can be reduced in many other ways.

Term 

If location and goodwill matter, a longer lease will be better, preferably with the protection of the security of tenure provisions of the Landlord and Tenant Act 1954.  If your existing lease is not protected, you may wish to request that your new lease is, giving a legal entitlement to a new lease after that one expires (subject to certain statutory exceptions).  Note that stamp duty land tax (SDLT) varies according to the length of term and amount of yearly rent.  If you agree a ten year lease with a break at year three, you will be liable for SDLT on the full ten year term.  To reduce SDLT, consider a shorter lease term, with an option to renew.

Break clauses  

A tenant right to break is an easier way out of the lease than assigning or underletting and may also be crucial after a rent review, if the rent increases above a level you can afford.  Resist all pre-conditions to exercising a break right, other than the payment of all yearly rent and the giving of vacant possession.  Courts continue to interpret even minor breaches of break conditions very strictly.  Ideally, you will have the right to break on a rolling basis, failing which try to agree regular break dates.  It is important to know that unless your lease contains an express right to repayment of any rents and other sums which you have paid in advance for the period after the break date, the landlord is not obliged to pay them back. 

Payment of rent monthly

To assist your cash flow, ask to pay rent monthly. Landlords have become more amenable to this, particularly if coupled with an agreement to pay electronically, rather than by cheque.

An initial rent-free period, reduced rent period or one-off inducement payment

It may be easier to sell this idea to the landlord if, for example, you are planning improvements to the premises or it may simply agree to avoid an empty property.  You could also consider seeking a further rent-free as a reward for not exercising a break right further down the lease term. 

Rent review

Landlords still favour the upwards only review but there is no harm asking your landlord to consider an upwards/downwards review to open market rent, especially if it can never fall below the initial annual rent.   Failing which, think about fixed increases, increases linked to a specified index (eg. the Retail Prices Index) or turnover-based increases.   Where an upwards only rent review is agreed, ensure that the value of your business is disregarded at review, also improvements which you have carried out during the term of the previous lease (as well as those during the new lease term). 

Assigning, underletting and sharing occupation

The ability to deal with the premises should be subject to as few conditions as possible.  Authorised guarantee agreements should only be required where reasonable, preferably not at all where your assignee is of greater financial strength than you.  On underlettings, agree only that the underlease rent should not be less than market rent.  References to the higher of market rent and the rent passing under your lease could prevent an underletting in a falling market.   Ask to group share without consent.

Repair and reinstatement

Your repair obligations (including any contribution towards repair costs via a service charge – see below) should always be appropriate to the length of your term and the condition of the premises at the start of the lease.  The only way to fully protect yourself is to agree to keep the premises in no worse condition than at the beginning of the lease, documented by way of a schedule of condition. If the landlord will not agree to this, you must carefully review the repair wording in the lease as this is a contentious area.  There are certain obvious precautions – like avoiding references to rebuilding and renewing, which clearly go beyond repair.  Reinstatement of alterations carried out during the term should only be required by the landlord where reasonable and the landlord should notify you of its requirements for reinstatement well before the lease expires. 

Service charge and insurance contributions

You will know previous levels of service charge paid by you but you must check whether any major new works are planned or some costly item of expenditure is imminent.  Where possible, negotiate a cap to limit liability.  Your service charge contribution may be calculated as a fixed percentage of total expenditure, which provides certainty and simplicity but may leave you exposed to items you do not benefit from – eg. a lift the other side of the building – or footing the bill for unlet space.  References to fair/reasonable/proper proportions offer more flexibility but more scope for dispute.  However service charge is arrived at (other methods include floor area and rateable value calculations), it is increasingly common and sensible for a tenant to identify items it won’t contribute towards the cost of – eg. future redevelopment and the replacement and rebuilding of items which are not beyond economic repair, as well as the costs referred to above.   As for insurance contributions, these may also be considerable.  Check that there is a rent suspension if the premises are damaged by an insured risk (and preferably an uninsured one too).   Also that if the landlord insures against loss of annual rent and service charge, the rent suspension covers both.  Ensure also that you are able to terminate the lease if the premises have not been reinstated by the time the rent cesser period expires.

Alterations and signage 

Applications for consent to alter or erect signage can be costly and time-consuming.   Ideally, your landlord will agree that internal, non-structural alterations can be carried out without its consent, unless they might affect services or systems in the remainder of the building.  If relevant, you should also ask that no consent be required for professionally prepared trade signage which doesn’t obscure more than X% of the windows of the premises. As a fall-back, consent in either case should not be unreasonably withheld or delayed.  Most landlords will agree to tenants erecting, moving and removing internal, non-structural partitioning without consent. 

To summarise

The more of the above points you can agree with the landlord, the easier it will be to run your business with minimum interruption, to hand back or deal with your lease should your circumstances change and to avoid nasty financial shocks over and above the level of agreed yearly rent.   Agree them as far in advance as possible, particularly if you do not have a protected lease as your entitlement to remain at the premises ends immediately the lease does.  Make a written record of all agreed points so as to minimise arguments, delays and additional costs when the lease negotiations commence.

Thanks to Emma Pereira, Howard Kennedy for her permission to reproduce it.

Blog articles are usually representative of what is currently on the radar with our clients and this one is no different – How many people actually read the small print?

The issue seems to be more prevalent at the moment as the relationships between lenders and their borrowers seem to turn sour faster than ever.  Realistically however the relationship has probably been going the wrong way for quite a while, and it is like your car, ignore those niggling sounds and one day something will let go and it’s the AA to the rescue.

It is when things don’t work with lending arrangements that lenders are relying even more on some of the things they were less concerned with in the past.  Three principle areas come to mind:

• Financial covenants associated with a loan
• Personal guarantees
• All Monies clauses

Let’s look at the first one – Many commercial (as opposed to Buy to Let – B2L) mortgages and borrowing facilities have covenants relating to loan serviceability, tenancies, loan to value and the production of timely Management Information (MI) lost in the pages of conditions associated with the facility.  When times are good lenders often overlook these, with markets tighter than they were and a lot of valuations being lower than when the money was taken in the first place, these are now being vigorously enforced.

We are getting new clients coming to us because their own bank want them to reduce their borrowing because the property has down valued, but I hear some say, how do they know, well the concept of desktop valuations have always been there, it doesn’t take a rocket scientist to ask the original valuer for their comments on your property even though you think they have never been back.

Others are now finding that MI they haven’t been providing is now being chased, and if a business is on top of things it should have them anyway, so sometimes a blessing in disguise, but the retained profits (or lack of) in your business could worry some lenders.

Changed the tenancy? Maybe your borrower should have been told, some B2L lenders are now insisting they are advised at every change of tenancy, and that could be every 6 months in some cases.

What about the second area – Personal Guarantees (PG’s) – If you run a limited company expect to give them, it is rare unless the directors of the company don’t own enough shares to control the business, that you will get away without providing them, and to be fair it is an acknowledgement on the director’s part that they are prepared to support the borrowing in the first place because it is usually the lender who has put more into the project than the borrower.  In the runaway ‘noughties’ PG’s were rarely considered as a risk indeed a lot of folk signed them without getting the independent advice that they should have done prior to giving them.

When the facility goes wrong, the lender can and do call their money in, so be wary of facilities that have an end date on them (how many developers do we know who have built their developments out and can’t sell or refinance them?), or covenants that could cause the dreaded ‘Event of Default’ and allow them to repossess or appoint a Law of Property Act receiver to collect the rents, because when they do and ultimately crystallise the amount of the debt, they will be coming to the Guarantors for the inevitable shortfall.

Finally, what’s an ‘All Monies Clause’ – simply put somewhere in the depths of the mortgage small print most lenders include this short bit of wording linking ALL debts and liabilities across the lenders various arms in the event of a default, and it can collapse a perfectly well functioning facility if another part of the associated facilities go wrong.  So whilst this is just an example, if you have your mortgage with a bank on your business or commercial premises, a series of B2L loans with that bank’s subsidiaries, and overdraft and maybe even a credit card with the same group and one goes wrong, it can cause an event of default with them all.  As we say avoid as much as you can putting all your eggs, both personal and business, into one basket because the chances are you will never fully be in control of that basket’s handles.

So, all I would say is look at the small print, it may not go away if it is a condition of a loan, just understand what you are signing up for and what will be the implications if you can’t adhere to them – You might lose the lot!

If your business is in this situation or you know of one to which this applies, do get in touch and we will do our best to help them.

I thought this was a very good article that covered the prospects for the Buy to Let (B2L) sector for next year so I have reproduced it in full and the original can be read here.  

Buy-to-let market positive for 2011

Commenting on the prospects for the sector over the next 12 months, Nigel Terrington, chief executive of Buy to Let mortgage specialist Paragon Group, said: “2010 has provided a solid base for the buy-to-let market on which to build over the next 12 months. Both the number of lenders and products has increased and gross advances are expected to be up at least 10% on 2009 numbers.

“I expect that positive sentiment to continue into the New Year. Gross lending will rise steadily during 2011 and, in the absence of any major economic downturn, should finish between 10% to 15% higher than 2010 levels. However, it will be some time before we see levels of lending that are consistent with ‘normal’ market conditions.

“Strong levels of tenant demand will continue into 2011, particularly given the Government’s planned changes to social housing, and this will provide the continued stimulus for the growth of buy-to-let lending.

“There will be strong opportunities for commercial brokers to meet the more complex needs of buy-to-let borrowers, especially for Houses in Multiple Occupation style property, where we see a growing market. As the Council of Mortgage Lenders recently stated, low levels of activity in the owner-occupier market will remain a feature in 2011 due to ongoing funding constraints, regulatory pressures and uncertain economic conditions, and this will create further pressure on the private rented sector.

“Landlords should profit from lower void periods and strengthening yields given rising rental levels and a flat housing market. I expect the buy-to-let mortgage arrears level to be flat to falling as landlords benefit from excellent levels of tenant demand and low borrowing costs, although landlords must be cautious of tenant unemployment and arrears.

“There will be a dislocation between the job losses caused by public sector spending cuts being ironed out by growth in the private sector and we are likely to see unemployment rise during the year. Landlords need to ensure that they have adequate rent guarantee insurance in place to protect themselves against defaulting tenants

We tend to agree with this lender’s sentiments, so if you have a proposition that is worth investigating do get in touch.