UK: LONG LEASES AND LONG FACES. - Tenants trapped in high-rent properties seek radical remedies.

Last Updated: 31 Aug 2010

Tenants trapped in high-rent properties seek radical remedies.

Low inflation has changed the rules of the game for most businesses. It took a long time for the effect of these changes to be understood but now the benefits of low inflation - in terms of cost stability - are all about us. Although not quite everywhere. It's partly because of low inflation that many businesses occupying leased accommodation are, in the words of one property expert, 'stuck with overrenting'. In the past 'inflation took us off the hook', but no longer. So how serious is this problem, and what, if anything, can be done about it?' 'The effect has been far more devastating than in any previous downturn,' argues Russell Schiller, head of investment at Hillier Parker May & Rowden, to the extent that some firms have been forced to cease trading. The problems are particularly acute in the retail and office sectors, also in parts of the industrial market, such as warehousing, which involve standardised units that are readily tradeable. (Big manufacturers usually own their factories, since these tend to be specific to requirements.) Where the tenant is, say, 10 years into a 25-year institutional lease, his rent may well be double what he would pay under a new lease, and he has no prospect of reducing this cost for another 15 years. If he is a retailer (or an estate agent, say), business may also be a lot slower than he would have predicted when he signed-up in the mid-1980s.

'There are degrees of remedy, some of them very radical,' says David Williams, a director of Savills. 'In some instances clients have thrown six years' money at landlords. It's painful up-front but actually it saves money.' Alternatively, suggests Schiller, the company could move out and put the property on the market - at a substantially lower rental. Another option is to make an offer for the freehold. Thorn-EMI has done this twice. The company bought the freehold of an office building north of London, also of a factory out to the west, and, having cleared the factory site, put both on the market. Neither has yet been sold. 'It was a damage limitation exercise,' says Thorn's property chief Graham Cant. 'We'll probably make a loss on the deal ... but at least we're not stuck with a lease that has light years to run.' Williams points out that some companies, especially in industries like communications and computers, are buying properties for their current use where they might once have taken a lease. ICL, for example, will consider acquiring the freehold of any property that it regards as strategic. Non-strategic properties will continue to be leased. The new policy, explains property director Les Pyle, was not brought about by low inflation but came out of a wide-ranging review - although that could hardly ignore current economic conditions.

Most retail traders on the other hand would not regard ownership as a sensible option. Yet retailers are among the most vulnerable to the rent review ratchet. Especially in shopping centres, says Boots the Chemist's director of estates David Stathers, 'the process of law and the mechanics of the rent review procedure conspire to the disadvantage of the occupier'. This is because the landlord need only prove interest on the part of a very few prospective tenants in order to lever up the rent of all a centre's existing occupants.

A few years ago Stathers, along with Hillier Parker's Mark Teale, pioneered 'retail audits' of tenants (at Brent Cross, London) who were in dispute with their landlord. The aim was to measure the impact of rental increases on trading profits, and discover whether increases were 'genuinely justified by external demand'. The device had limited effect in restraining increases but was successful enough to have been used again elsewhere.

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