Times are changing for rent review surveyors. Our focus is no longer only on rent reviews
18 February 2011 | By Tony Lorenz
Professional Opinion
More often than not, lease restructuring or lease renewal is the main focus, whether we are acting for the landlord or the tenant.
Over the next four years, more leases will expire or be subject to break clauses than in any other period of the past 50 years. The reason for this is the collision of three factors:
The upshot of these factors is that there are twice as many lease renewals than ever before. But it is important for landlords and tenants to remember that contracts can be changed. Both parties should be talking to each other – too often they do not.
There are twice as many lease renewals than ever before
An occupier that has a lease that is expiring or a break clause in a couple of years, but is likely to renew anyway, can approach its landlord to negotiate a rent-free period or other inducements to commit for a longer term. A similarly proactive landlord should work with its tenant to ensure the tenant does not succumb to the temptation to relocate. This area of corporate lease restructuring has become the arena in which my firm is busiest.
If an occupier waits until its lease is near expiry to approach the landlord, then the landlord will be reticent to give any inducements towards renewal.
However, if it approaches two years before the lease expiry or break clause, there is more scope to do a deal. Landlords look at investment value and security of income in their buildings and, if a lease is two years from a break or expiry, then it makes sense to give a rent-free period to an occupier who extends. This payment is justified by the subsequent rise in the investment value of the building.
Win-win situation
Here is an example of how it works. On one building in west London, we were acting for a tenant. A landlord paid our client £2m to remove a 2014 break clause from the lease and extend the term from 2018 to 2020. The tenant was happy to commit to the longer term and so got £2m for doing what it was going to do anyway. For the landlord, the payment of £2m increased the value of its investment by £4m-£5m. It is a win-win situation.
An occupier would be looking at getting about five to eight months rent free to extend a five-year term up to 10 years. And by acting two years early, the landlord would gain seven years of secure income. The early restructuring would also allow the landlord to avoid the competitive situation that would be created if other agents approached the tenant before the lease expiry and tempted them to move elsewhere.
Relationships between landlords and tenants can and should be open to change through proactive dialogue, which can often be mutually advantageous. The rent review surveyor today needs not only to understand the rent review market, but also investment value analysis in order to restructure leases for whoever it is representing
Source:
Tony Lorenz is senior partner at the Lorenz Consultancy
Social networking