In such testing times, every nursery operator in the country will be carefully analysing their overheads and attempting to identify ways of reducing outgoings.
As property related expenditure can be a major part of a business's costs, any opportunity to reduce these liabilities is welcome.
If your property is held on a leasehold basis, the lease is likely to contain rent review provisions which often only allow for rent to be increased. However, if your lease allows for 'upwards only' reviews, you should not simply ignore any notice from the landlord to increase rent on the assumption that the rent cannot possibly be increased. In some cases the growth experienced since the rent was last reviewed may not have been nullified by the recent downturn. There may also still be some areas where there is continued rental growth.
Even if there is no evidence to support an increase, certain leases contain very stringent review provisions, which require tenants to serve prescribed counter notices within a certain time limit in order to avoid being deemed to have accepted the landlord's proposal. Tenants are encouraged therefore to seek professional advice on rent review notices received.
In addition, if the lease contains a historic rent review which has not been formally agreed, it is advisable to address the issue as soon as possible, thus preventing the landlord from retrospectively instigating the review if, and when, they are in a position to justify an increase in the future.
Advice should also be sought on any notices received in respect of those leases that are coming to an end. Even if no notices have been received, you should be thinking about implementing the renewal process yourself, at least 18 months before lease expiry.
BARGAINING POWER
It is important that tenants take a proactive approach to lease renewals. They should therefore be aware of where the rental value lies, as tenants can now submit Interim Rent applications following the 2004 reforms to the Landlord & Tenant Act 1954. The timing of such notices to implement the renewal proceedings has become more crucial.
Tenants should also be aware of leases which are contracted outside Sections 24 -28 of the 1954 Act. These do not provide any security of tenure and a proactive approach is essential to avoid being held to ransom.
Tenants can extract value from their lease even if the lease is not due for renewal in the next few years, or if there are tenant break options. For those prepared to commit to a property long term, leases can be restructured as many landlords are willing to trade term for some form of financial inducement.
GAUGING VALUE
To assess the rental value, a myriad issues need to be considered, including physical factors concerning the nature of the nursery, its location and the terms of the lease. Assessing the true market value is particularly difficult. It is not like valuing a high street shop where there are comparable properties nearby.
Deian Evans is associate director, lease advisory, at Lambert Smith Hampton. For more information go to www.lsh.co.uk
CASE STUDY
While sometimes it is possible to negotiate a lower rent, maintaining a rent at an existing rate can be a very positive alternative to a proposed rise.
This was the outcome for one national nursery chain, based within the M25, which called in professional help when it faced a revised rent of £85,000 a year.
Having established the property was held for a term of around 15 years at a starting rent of £76,000 per annum, the lease terms were carefully examined by the adviser to assess how these impacted on the rental value. The rent review provisions were also scrutinised as these govern the review process, together with the basis upon which the rent is assessed, including the various assumptions and disregards that have to be made.
For example, although the property can only be used as a nursery or for any other use falling within Class D1 of the Town & Country Planning (Use Classes) Order 1987, one of the rent review assumptions state that the rent could be assessed based on B1 (which includes office use) or any D1 use - whichever generates the higher value.
A detailed inspection of the property was subsequently carried out to assess its floor area and environment, while the local market was researched to gauge its open market rental value at the review date, based on the terms of the lease.
As a result the nursery was advised to reject the landlord's proposed rise, and negotiations commenced to secure the lowest possible settlement.
Despite the evidence and justification for an increase put forward by the landlord, the nursery's representative maintained a robust stance in resisting the increase and obtained the landlord's agreement to document the rent review at the current rate.
TOP TIPS
- Seek professional advice on any rent review or lease renewal notice received as soon as possible
- Do not allow rent reviews to be left in abeyance
- Proactively consider your strategy at least 18 months before lease expiry
- If you are prepared to commit to a property in the longer term, consider using the current market to extract value.
