Renegotiate your lease

Now is the time to ask for better terms on your lease.

The economic downturn brings obvious threats to business as consumer and customer confidence falls and orders are hit. Businesses should be looking for opportunities to cut costs to help them through the hard times.

One area to look at is property. The residential and commercial property bubbles are bursting as banks tighten their lending and businesses begin to feel the economic squeeze. But what does this mean for the leasing market? Is it a great time to be renegotiating the lease on your office or shop? Can you reduce your rent or find a new space for a bargain price?

No landlords will want an empty property on their hands at present given the policy on empty rates.

Tenants are either handing in their keys because they can't afford to pay rent anymore or they are renegotiating both their rent and their rental payment terms.

"Because of the downturn there are more properties to choose from. This means landlords are trying to make their property more attractive," says Rebecca Simpson, partner at solicitors SAS Daniels. " The flexibility of leasing terms has been most affected. A lot of landlords are more inclined now to look at break clauses, shorter term lettings and taking on the responsibility for tidying up the premises before the tenant goes in."

Another driver behind this trend is the scrapping of empty property rate relief earlier this year. "This has hit landlords quite hard because empty property now costs them money," says Simpson. "A few years ago the landlord was in the driving seat but not now. There are opportunities for tenants to maybe not get their rent going downwards but certainly getting a couple of months rent free."

Simon Brierley, head of commercial property at George F White. adds: " I haven't seen any rent reductions but the balance of power is shifting. If a tenant has a rent review coming up they have got some very good arguments for keeping the rents low, getting flexible leases, easy in and easy out terms or rent-free periods."

Ian Fletcher, director commercial and residential at the British Property Federation, says businesses should be clear about the terms they wish to negotiate with their landlords. "It pays to ask for the terms you want," says Fletcher. "As they say up North 'shy bairns get nowt!'. But before you do negotiate be clear about what are the most important terms for you. For example it might be important for a start-up business to have a break clause so if they do get into any difficulties and have to move on they can do so."

The most high-profile leasing campaign at present is that being led by Topshop owner Sir Philip Green. He wants a switch from quarterly to monthly rental payments to ease the stress on cashflow for tenants.

Fletcher says: "He is showing what should happen in these conditions and that is occupiers and landlords having an open and regular dialogue. It is certainly our policy that for businesses that are struggling, but otherwise viable, landlords should consider changes to lease terms to help them through these difficult times. No landlords will want an empty property on their hands at present given the policy on empty rates."

One business currently looking at better leasing rates is Windsor based Rawnet. Managing director Adam Smith says it moved into its present offices a year ago.

"Given the economic downturn we have decided to see what is out there," Smith says. "If other companies are going under there will be some empty properties that were not available a year ago. There will be more choice."

Smith is looking for lower rates and rent-free periods and is using property firm Haywards to help them do so. "We are anticipating finding a better deal in the next 6 months," Smith says.
One company with a good deal already in the bag is London based S.I.Partners. Because of historical lease rates it was faced with its rent increasing by 100 per cent when its lease period recently came to an end.

Partner Otto Stevens states: "We decided to negotiate. We went in and told them that the service we had received over the last four years had been poor. We used the economic downturn to say that we could leave and find another property at a better rate. We played hard ball with them."

The result was a reduction in the proposed rent increase of 22 per cent. "Too often businesses accept terms without negotiating hard. You have to stand up to landlords. This is now a buyer's market because the last thing a landlord wants is an empty property and to try and find a new tenant," says Stevens.

Rent reviews based on historical evidence will be a problem in any negotiation says Brierley.

"There are not too many lettings taking place which will prove the lower level of rent. Landlords will show evidence of rates from 6 to 12 months ago," he explains.

Harry Katz of independent financial adviser Norwest Consultants, describes other potential negotiation pitfalls. "Some landlords, usually in London, will stick to the terms of the lease and not budge. They will only move if the lease is coming to an end and how you renegotiate will depend on the lease you have. Some may have an upwards only review clause. It isn't a given."

However for start-up businesses he says there are plenty of opportunities to find vacant properties at a good price. "There are loads of them out there. If you don't screw the landlords to the floor then you are not doing a good job."

For new business owners unfamiliar with leases, go to www.leasingbusinesspremises.co.uk. Most leases are complex documents so owners should employ a solicitor.

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