Living with Landlords

Copyright: David Lawson – Real Finance April  2001

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You move home an average of half a dozen times in your life and it rates as the most traumatic experience after family bereavement and divorce. But at least you learn from bitter experience. Businesses can go a couple of generations without moving, so everyone is in the dark about dealing with landlords.  You can’t even learn from the one you already have, because you  probably won’t ever see him.  It is not like renting a flat. The uniquely British full repair and insuring lease (FRI for short)  means commercial tenants are responsible for just about everything. If something breaks, you fix it. If it leaks, you plug it. If it catches fire, you restore it. You even pay for the insurance. And at the end of the lease  you hand back the premises in perfect order or pay the difference.

  Despite this, a thick layer of bureaucracy has evolved to keep landlord and tenant apart. You will usually meet managing agents rather than their master – or at least meet their junior staff. Once every five years or so this all changes. A sense of power  swells the heart of every finance director when negotiations over the rent review begin.  But even this is illusory. The small print in most leases says payments can go only one way - upwards.   So how do you cope in the face of adversity? Choosing the right landlord can be  like Blind Date without a bunch of researchers prompting you with the right questions. And make no mistake, a new building is just like choosing a mate, as leases can last anywhere from 10 years to a lifetime,  with the cost of divorce just as heartbreaking.  


 The first thing to do is recruit your own bunch of researchers. Estate agents rank lower than vermin in public perception but those are home-floggers. A commercial agent works for you rather than the seller.  They know what’s on the market, what it costs to buy or rent and whether it will fall down tomorrow. Always get a survey. And always get a legal eagle to pore through the paperwork. Leases can run to a wheelbarrow-sized 40 pages or more. These  footsoldiers revel in thoughts of battle with  the landlord’s troops. Why else would they join such apparently dull professions? What else could they talk about over a round of golf?


Where do you want to go? Who is more important: staff or customers?  You may not need an office in a town centre if most of the work is done on the phone. A shop may not need to be on an expensive high street, particularly when two blocks away the rents plummet. A warehouse or factory can be in the middle of nowhere if the roads are good enough for deliveries.  But remember public transport for your staff.. Not everyone has a BMW like yours.


How much space do you need?  Cat-swinging capacity today may turn into the Black Hole of Calcutta next year if the sales manager surprises everyone and actually ties up that new contract he has been boasting about. But what if he doesn’t? Will you be stuck with all that extra rent? Not necessarily. Look for an option on expansion space next door, or premises that can be divided for sub-letting. Even the big boys do that with glossy City office blocks.


The big property companies and institutions which own vast swathes of UK property want to let and forget, so they will demand a contract for 15 years or more. Resistance is not futile.  Leases are shrinking under pressure  from occupiers, particularly on second-hand buildings. Even the government has waded in by pressing for shorter timespans and the end of iniquitous upward-only rent reviews. If you hit a wall, look for a smaller landlord. They can be less hidebound, offering leases as short as five years.


 Why not rent by the month? Serviced offices have been dragged out of seedy backstreets by firms like Regus, Abbey, HQ and MWB. You get posh furniture, snooty receptionists and swish computers for an all-in price. Landlords like Arlington Securities offer similar short tenure on out-of-town business parks.  Even the unglamorous trades have more options through industrial owners Saville Gordon, which grant short licences on small workshops and warehouses


The perfect scenario, of course,  is to have no landlord  but that means tying up capital in bricks and mortar. Public companies are under enormous pressure from the stock market to do the opposite, releasing resources to invest in core activities. Look at Marks & Spencer. Look at BT. Look at Abbey National. All are selling off billions of pounds worth of property. Sale and leaseback is becoming a mantra for the afflicted. But proposed changes in accounting regulations could throw a different light on this trend. Rents traditionally played no part in the profit and loss account and balance sheet. The Accounting Standards Board aims to change that, demanding that outgoings are included as liabilities. Double-entry listing of the benefits will balance the figures but there is a hefty hidden penalty. Analysts say this procedure will raise gearing and hammer credit ratings. That could swing the balance in favour of buying.


Don’t listen to the chairman. He’ll want to get somewhere near his golf club.  Do listen to the production or office manager. They knows how much legroom everyone really needs.

Don’t accept landlords’ claims that long leases are the norm. Think of Norm from the long-running Cheers comedy: bloated and profligate. Do look for alternatives like buying or serviced offices.

Don’t do this at home. Get expert help,  and drive that help to meet your needs rather than accept a standard solution.

Do remember that a building is not just for Christmas. It could be for the whole of your career. It’s not like buying a pet. It’s not even like planning a marriage. It’s far more important,  like buying a car. You wouldn’t do that without inspecting it, testing it, kicking it and costing it. Or would you?