A lease expert tells Head of Business Alun Thorne why a dose of realism is the key to making sure occupiers get the right deal during the downturn.
As recession bites deep into High Street retailers, service industries and manufacturers alike, lease terms signed during more buoyant times can seem impossible to meet.
Dwindling cash-flow brings the spectre of administration looming into view, but one of Birmingham’s best-known corporate lease experts says such action must always be a last resort.
“I can well understand how tenants on long-term leases, paying sizeable amounts of rent each quarter in advance, feel trapped by the conditions to which they agreed, and don’t see a way out”, said Andrew Crampton, who heads King Sturge’s lease consultancy team in Birmingham.
“What they should never do though, is simply surrender. There are several potential ways in which they can restructure their lease, reduce their immediate requirement for cash, and stay in the same premises.”
Crampton says pragmatism is the most powerful influence on the willingness of property-owners to change the conditions of a lease, even though it might only be a year or 18 months old.
“Landlords don’t want space back in the current economic conditions, as they might well face delays in finding a replacement tenant, and no one wants voids,” he said.
“A low rent is better than no rent, and landlords may well be able to use the negotiations to improve their position, for instance by lengthening the period of the lease or removing a break clause, which will give them additional security and higher capital values.”
Such negotiations would traditionally have taken place, as tenants approached a lease expiry or break-clause in their lease, but Crampton says the unforgiving economic conditions are forcing companies to turn to their landlords with no lease end or break in sight.
“Increasingly, especially in the retail and industrial sectors, tenants are so concerned that they are asking questions they would never have considered a year or so ago. Most landlords are proving willing to listen and change their lease conditions if there are mutual benefits. There are several options.
“The user clause or sub letting provisions could be widened, allowing the tenant to sub-let part of their space, perhaps for an alternative use, so they can downsize and stay. Tenants could also offer to extend their lease or remove a break clause, if the rent is reduced, or they might persuade the landlord to accept a rent-free period.”
Tenants who believe the recession has strengthened their negotiating position are also pressing for their space to be refurbished, with the implicit threat that they might move elsewhere when the time arrives if improvements don’t happen. However, despite the increasingly bleak economic landscape, there remains a significant potential downside to tenants of taking the ‘take it or leave it’ approach.
“Negotiations are often about brinkmanship, but tenants must first consider where else they might go, how much their removal costs would be, and how much they might have to spend on dilapidations to their present premises before leaving.”
With more than two decades of experience behind him, Crampton says all parties should always follow Churchill’s dictum that jaw jaw is better than war war.
“It is in everyone’s interests to reach a solution which allows both the landlord and the tenant to walk away, having improved their own position.
Ideally, the former gets an enhanced long-term commitment, in return for offering the latter increased financial flexibility.”
Crampton highlights a growing trend in the High Street retail sector, for tenants to change payment intervals, rather than trying to reduce the previously agreed rent level.
“Essentially, they are going to their landlords, explaining what a state their balance sheet is in, and asking for sympathy. We have seen quite a number of cases where tenants request that they still pay in advance, but monthly, rather than quarterly,” he said. “Some, who have seen their cash-flow virtually dry up, have offered to pay what they owe, but in the future, rather than immediately.
“Alternatively, some are seeking rent reductions or rent free periods. Obviously, as with all lease negotiations, it requires fine judgement on the part of the landlord and their advisers to assess the merit of such an offer.”
The King Sturge observer said the most critical element of all lease negotiations, during the present recession, has to be an understanding of the wider issues. Realism is the key. Tenants can’t expect to get something for nothing, but landlords have to see the plight of their tenant against the backdrop of what is happening throughout the global economy,“ said Crampton.
“Well-run companies, with sound strategies and good products and services, are going to the wall because cash is desperately tight, and it does no-one any good to adopt a blinkered approach, and to simply insist that an agreement is an agreement.”