As the benefits of a flat-line economy start to disappear it’s vital that both landlords and tenants get rent decisions right — or face five years of paying the price.
The warning comes from a leading commercial agent who says the traditional five-year gap between property rent reviews has its planning benefits, but if calculations and decisions aren’t correct it can have a huge impact on a company’s growth and profits.
“For the past five years or so — thanks to a flat-lining economy — there has been limited rental growth since 2008,” explains Ian Harman, a director at Northamptonshire-based Prop-Search. “But as the country’s economic situation has started to improve, this has led to the inevitable rise in demand for commercial premises.
“An increase in demand inevitably leads to an increase in market rents,” he adds, “so that tenants with rent reviews coming up will no doubt find their landlords starting to pursue an increase.”
In these cases it is wise to instruct an experienced surveyor with local knowledge to carry out the rent review negotiations, whether you are the landlord or the tenant in occupation.
It will give you the reassurance, Harman says, of knowing that you are paying a rent which is in line with the market and takes account of the building’s unique characteristics, plus any lease issues likely to impact on rent.
Another property overhead that can affect a business’s profitability is service charges on the property it rents. In commercial, multi-let buildings, this is billed by the landlord to the occupiers of the property to cover spending on maintenance and repairs to the common areas used by all of the tenants.
Typically covered are receptions and foyers, along with staircases and lifts. But the costs of security, cleaning, and mechanical and electrical provisions, as well as structural costs — often considered the hidden expenses of occupation — may well also be included.
“It is a charge that is governed by the covenants of the lease and the costs are set by landlords and budgeted on an annual basis,” explains Harman. “These areas could be neglected if their management is not undertaken correctly or, conversely, services could be provided to a higher than expected level — both scenarios will also affect rental levels.”
Again, it’s advisable to have your service charge reviewed by a surveyor. For a tenant any saving in this regard can only have a positive effect on profit margins.
“The traditional five year gap between property rent reviews may be helpful for business planning,” concludes Harman, “but it can leave you with half-a-decade to rue your mistake if you get it wrong.”
