How to avoid dodgy tenants and landlords

Copyright: David Lawson - published Property Week October 2005

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A shudder went around managed business space operators this summer over reports that Southern Cross was being liquidated. They fought a hard battle to wipe away prejudices over what had been seen as a slightly dodgy business based on back street cubby holes, then along comes a scandal to renew doubts.   But fears appear to have unfounded. The industry is a different animal to 10 years ago, when the last scandal hit the headlines. It now boasts big names like Regus, MWB and HQ, which have created the strength to shrug off setbacks, even though they have faced their own financial problems.  

   ‘We were deeply concerned that this should not be viewed as a reflection on the integrity of the industry as a whole,’ says Richard Boon, chairman of the Business Centres Association [BCA].   ‘In any industry there will always companies that fail to make the grade and fall by the wayside. While the problems of Southern Cross have given everybody in the industry a wake up call, overall there has not been a noticeable fall in demand as a result of the company’s problems.’

  But it has raised some sharp questions. For instance, the government is about to fill a long-criticised gap in protection for residential tenants with new rules that deposits must be placed in authorised, independent accounts. Yet commercial tenants remain unprotected.  The BCA is studying plans for a similar voluntary system so tenants are not left stranded. Insurance cover, much like that covering travel agents, is also a possibility.

  Landlords hunting would cover their backs by demanding such cover from operators handling their surplus space. After ignoring the potential for farming out space for so long, many are now piling in with scant regard for the business practices they would employ letting conventional space.  But the safest option is to spot potential problems before they arise. Southern Cross boasted accounts backed by big names – only for those backers to deny involvement when Property Week probed the firm. Yet several landlords have said privately that they had doubts and refused to play.

  The England cricket team won the Ashes by spotting Shane Warne’s legendary ‘wrong ones’ and it is not beyond tenants and landlords to do the same among the wave of newcomers flooding into managed space.

Tip One – look behind the figures.

  ‘I’m amazed that no-one ever asks about my company when taking space,’ says Boon, who runs six business centres as head of Oasis. ‘Yet they are often taking a 12-month commitment and handing over a three-month deposit.’   Tenants should check an operator’s economic strengths and stability. Landlords are already meant to do that, but some clearly failed to dig deeply enough into Southern Cross. References from other landlords going back some time should be standard.  A good track record is always desirable. Many perfectly efficient and honest newcomers cannot do that but landlords can demand hefty deposits instead -  certainly the equivalent of a year’s breathing space if sub-letting property for which they are liable to pay rent to the owner.

 Tip Two – check the rates bills

  A major selling point for managed space is that business rates are wrapped up in the overall fee. But operators may list individual tenants on their rate returns so they can break down space and claim discounts on sections which are empty.   If the bills are not paid local authorities end up chasing individual tenants who have already paid this charge to the operator, as Westminster is doing to former Southern Cross tenants. This can involve substantial amounts, as rates make up 10-15% of total fees.

Tip Three – Take Legal Advice

 Using a lawyer should be self-evident, particularly for landlords, yet it is still easy to stumble into a massive pothole.   Most are used to conventional ‘let-and-forget’ leases which are tightly controlled so space can be recovered if rent is not paid and at the end of a set period. Business centres rely on licences geared to short-term occupation, however, which lie outside the Landlord and Tenant Act. If an operator goes bust, badly drafted licences can leave landlords with sitting tenants. They should insist lawyers see the operator’s standard licence and include a condition that any variations are approved, says Boon.

Tip Four – check for membership of an industry group

  Naturally, Boon advocates BCA accreditation. With more than 600 member centres, it covers the majority of the industry anyway, and is the only UK trade association specifically representing business centre and managed workspace.   The BCA has no regulatory powers, however, nor authority to punish. Any rules about putting deposits in protected accounts and an insurance safety net are likely to be voluntary, as many operators – particularly the big names – believe they have strong enough systems already in place and would not want to pay for more.  But it has made great strides raising standards by promoting a code of best practice and educating operators about responsibilities and potential pitfalls.  ‘If Southern Cross had been a member it would have been made aware of the commitment required,’ says Boon. 

  Businesses will always go bust. It happens to conventional landlords all the time – and turns into a torrent when markets are sliding. The fact that business has continued almost unchanged in managed space shows that the sector has matured to a similar level.  A collapse can even be an opportunity. Boon points out that he started in the sector 10 years ago when an operator managing a building owned by his family firm went bust and he took over. Now it is his full-time business.