Property matters

As part of our content series with Moving Tribes, Julian Hindmarsh speaks with Ian Shepard, founder of Moving Tribes and Chairman of Bensons for beds, about commercial Real Estate.

IS: Commercial property seems to be its own complicated world, with confusing terminology that can be intimidating, especially to smaller businesses. Why is that?

JH: Yes, it can be complicated, and a comparison with other European countries suggests that it doesn’t need to be. The UK framework, for example, is set by the 1954 Landlord and Tenant Act and leases can either be ‘inside’ the provisions of that Act or ‘outside’ them. The result of that is that both landlords and tenants have to be really careful about what kind of agreement they are making with each other. The reality, I’m afraid, is that both parties need to make sure they get good professional advice before signing anything.

IS: That international perspective is interesting - how else do other countries differ from the UK and what lessons does that potentially offer UK legislators?

JH: Many other countries work off ‘codes of practice’ rather than the formal structure offered by the 1954 act in the UK. Partly as a result of that and partly just as an accident of history, my perception is that there is much more flexibility in those countries - in France, for example, a typical retail lease would be “3+3+3” - so a three year term with two opportunities to extend. It is also more common in other countries that a tenant who was struggling to make a return in a particular property would be able to use that fact as a reason to leave the property, or to renegotiate to something like a turnover-based rent unlike the UK where a tenancy is an agreement which is hard to break or amend.

As a measure of the stark difference, I worked with one client who opened a flagship store on Oxford Street. They were disappointed with trading and sold the lease on for a premium, but that premium was so large that it funded the opening of 10 new stores elsewhere in Europe!

IS: I think many UK based readers would like some of that flexibility! Is there much chance of that happening here?

JH: I don’t think there much imminent prospect of legislative change in this area in the UK. It isn’t really a ‘vote-winner’ and therefore isn’t likely to get much political airtime. The only way that would really change is if industry groups that span the retail and hospitality sectors lobbied hard for it. But then, they have done exactly that on the other big commercial property issue - Business Rates - and we’ve not yet seen much return from that effort either.

Even if legislation doesn’t change, however, that isn’t entirely a counsel of despair. Gradually, things are evolving in UK commercial property just from the changing world in which tenants and landlords operate. Leases have become shorter, for example. Retail leases which were once as long as 25 years are now often 10 years with a 5 year break, and hospitality sector leases, although longer, have also come down.

There has also been some move towards rents which are related to business performance (so a base rent plus something connected to turnover) although that remains a small part of the market and usually only negotiated when a tenant is in real distress. However, it is showing that landlords are trying to make some inroads into meeting tenant’s evolving business needs.

IS: It is good to see that evolution, but the UK remains a really challenging place to be a commercial tenant - why is that?

JH: Yes, there are still aspects of Commercial leases that remain ‘tenant unfriendly’ like open-market rent reviews that only ever go up, as well as the relatively long lease terms. Rent reviews are a particular issue (and one that Ireland has recently addressed in legislation) because at any given moment there are always businesses hungry to sign up new sites for their expansion, and that tends to push the rent up for everyone at the review point.

Again, though, we do see some increasing flexibility such as rent reviews with a cap and collar structure that limits future rises. We spend a lot of time on behalf of our clients negotiating exactly that kind of increased flexibility.

As to why the UK is the way it is, it may in part be the result of the nature of the business model of the landlords themselves. Some of the large commercial landlords have their own debt financing structures and that can make them less able to be flexible with tenants. I spent a lot of time during Covid, for example, negotiating with landlords and some were much less able to support their tenants than others because of their own balance sheet issues.

IS: OK, that reference to landlords prompts to ask a question that I know confuses a lot of MT readers who are concerned about their own local High Streets. How can it be that an empty retail or hospitality unit can just sit empty for years?

JH: There can be all sorts of reasons why properties stay empty. In many towns across the UK, for example, the landlord base is extremely diverse - you have private individuals, family trusts, pension funds, local institutions and all sorts of other landlords owning buildings on the same High Street - in other words, fractional ownership on the High Street. The landlord might be overseas, might not regard the individual property as all that important a part of their portfolio or just not be paying much attention. Equally, they might be making a commercial decision that they would rather wait for a higher rent than take a lower one now.

Even in circumstances where the landlord is a big commercial property business (so a shopping centre or retail part for example) you can get extended vacancies. If the landlord regards the ‘rentable value’ of the property as core to their overall valuation, for example, then again it might be in their interest to hold out for a higher rent even if it means an empty unit in the short term.

IS: Thanks for all of that context. Taking it together, then, the UK Commercial Property market is a complicated one and likely to remain so. What’s your advice for a reader who is interested in expanding their estate?

JH: Fundamentally, anyone looking at taking a commercial property needs to be very sure of their sums. They need to know their business model and have properly assessed whether this property is the right one for them. Does it have enough footfall, and is that footfall made up of the right types of potential customer, for example?

Beyond that commercial assessment, my other advice is that any tenant needs to get the best professional advice they can. Now as a lawyer, I’m bound to say that but it is particularly true right now - because of the nature of the UK market the difference between a well-negotiated lease and a badly-negotiated one can be very large indeed, and can make the difference between your business being viable or not.

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