Buy to let market slows

Recent reports suggest that the buy-to-let market is cooling after recent measures introduced by the government to control the power of landlords and other individuals buying second properties.

The new 3% additional tax was one of the measures introduced in April 2016. In short, it levied an extra tax on top of stamp duty, which was meant as an attempt to cut back on the accumulation of properties by private landlords.

Another attempt to introduce rent control was the removal of tax relief on mortgage interest altogether which came into April this year.

The laws affected mainly individuals, but not companies, and this has not gone unnoticed. In fact, some individuals are continuing to exploit the loopholes.

One such measure is to buy commercial properties for conversions into private flats. Commercial properties are unaffected by the additional tax levy, and hence at the point of purchase the tax is lower.

Some individuals have also set themselves up as a company, and purchases are done via the company. While many of them claim this tidies up the accounts – as the properties come under the financial expenses of the company, others accuse them of profiting from this because the interest is treated in a business expense.

It appears that many private landlords too are contemplating that the company structure is the way forward for them. Certainly, it seems that many considering investing in buy to lets are setting up companies first, and then making purchases. Those who have yet to set up companies but wish to assimilate this form of structure may find that they are coming under the financial squeeze of the government.

What does that hold for the rental market and the many thousands of young professionals that are dependent on renting as a step to the housing ladder? It appears it may be a step they never come down from. Landlords – in the form of companies – may only resort to raising rents in order to cover costs.

A quick summary of what mediation entails

Mediation is a voluntary process in which the people involved in a dispute agree to sit down together with a neutral third party – the mediator – and discuss their mutual problem. They then work together, seeking a solution to the problem with which they can all live. Most often there are two people involved in a dispute, but there is no limit to the number that can be involved, or to who can attend a mediation to help resolve the dispute. While the mediator facilitates this process, the solutions that the people in the dispute come up with are entirely their own.

Mediation is voluntary because if someone absolutely does not want to attend a mediation, trying to force them to do so is unlikely to help in reaching resolution. You may have all kinds of misgivings about the party or parties with whom you are in dispute as you go into mediation, but essentially you must want to at least try to solve the problem. Mediation cannot work in any other way.

Generally, as the first step in the mediation process one party will contact the mediator expressing his or her desire to explore the options for mediation. If the dispute has reached a point where the parties are no longer in communication, most mediators are happy to speak to each person individually and confidentially, and to handle all contact in setting up the meeting between them if that facilitates the process. What the mediator cannot do is to force or coerce the other party to attend. All he or she can do is to talk to them and to explain the principles and processes of mediation, taking care to answer all their questions. Once the parties agree in principle to mediation, and before they’ve even sat down with the mediator, they are showing a willingness to resolve the dispute.

Mediation’s emphasis is on moving forward – not on looking back. Your dispute has got to where it is now and, however it got there, focusing on that part of the problem usually does not help anyone come to a resolution. Mediation’s purpose is to focus on the future and to progress on new terms with which everybody can live.

When you go to court, the focus is always on the past: who has been at fault, who has broken a contract, who has done something wrong, who has done what to whom. At the end of the court process a decision is handed down by the judge which attributes blame and prescribes a remedy. The court generally makes no attempt to give direction on how the parties should proceed in the future, and certainly does not want to involve itself in any ongoing supervisory role. This can be particularly difficult if the parties have to remain in any sort of relationship with each other such as in family cases or in cases involving relatives or work colleagues.

Mediation’s focus is on how to move forward and this is achieved by directing attention on how to solve the problem. It can also contain agreed terms for the future conduct of the relationship, if that is what the participants want.

Disputes in any context tend to generate a lot of bad feeling and high levels of stress. Have you ever been in a dispute with anyone? Most of us have. No matter how small the argument, feeling angry, unheard and misunderstood does not feel good, even if you are convinced that you are 100% in the right. Relationships of all kinds can be heavily damaged by dispute. The longer people remain in dispute with each other, the more they look for evidence to support their point of view in the argument and they therefore focus on the dispute. They fixate on this and focus all their energy on it to the extent that finding a workable and amicable solution that helps find a way out could not be further from their thoughts.

When people are in conflict, stress levels can rise sharply, and this is not healthy for anyone on either side of a dispute. Relationships outside the argument can also suffer when someone is very angry for such a very long time. When an amicable, acceptable resolution is reached, stress levels immediately drop and people feel much more positive and much lighter. A weight is lifted from their shoulders and the time and energy they once focused on the argument can now be used for things that are helpful and enjoyable to them.

Mediation is entirely confidential. This is another very important point and must be strictly observed by the mediator and by all parties to the dispute. Anything that is said or done in a mediation cannot be revealed to outside parties either during or after the mediation.

Mediation is also ‘without prejudice’. If your mediation is one of the few that is unsuccessful, and the decision is taken to proceed to court, whatever was said in the mediation may not be relied on in court by either party without the express permission of the party that made the statement. This means that if something new comes to light in an unsuccessful mediation, this information cannot be brought into the legal arena. Neither can the mediator be brought into the legal arena as a witness, save on the orders of a Judge.

The description of the mediation process as without prejudice means that anything said during the mediation cannot then be used as evidence in any legal proceedings which are being considered or already started. This allows parties to talk openly about options for agreement. Parties are able to suggest new and creative possibilities for agreement without jeopardising their chance to go (or to go back) to court if an agreement isn’t reached. A mutually agreeable outcome is often one which could not have been reached in court.

With the exception of family mediations, where some records must be kept, the mediator destroys all notes and information relating to the meeting apart from the agreements to mediate and the record of the attendees at the meeting. This further protects the confidentiality of all who attend as there is then no danger of any information falling into the wrong hands.

The voluntary and non-binding nature of mediation means that parties are not compelled to reach an agreement and options for an agreement can be discussed without binding themselves to a particular outcome. There is no consequence on the parties if they are unable to agree (other than financial loss where the mediation is self-funded). Mediated agreements are only binding if both parties wish them to be.

During a mediation, while the mediator assists and facilitates the process, the parties are responsible for generating options for agreement and the terms of any settlement reached. The mediator does not offer their opinion on the merits of either party’s case or seek to determine or impose any outcome. They do not make suggestions or recommend proposals for agreement (but may pass offers between the parties if requested to do so). Any agreement reached must be mutually acceptable to all parties and will have been created by them.

It is integral to the mediation process that parties are able to make informed choices, about what to propose by way of agreement and whether to reach a settlement. Mediators encourage parties to explore their positions so that any agreement reached can reflect their needs and interests. Mediators also encourage parties to consider the likely alternatives to reaching a mediated agreement to objectively assess any offer on the table. When a dispute involves legal rights and entitlements, parties should seek legal advice before commencing mediation. Parties may have a legal adviser present during the mediation (or available on the telephone), or be given the opportunity at the end of the mediation to consult a legal adviser before reaching a legally binding agreement.

Mediation invites parties to widen the potential options for agreement and explore new possibilities and ideas. Mediated settlements can be reached where direct negotiations have failed by getting the right people in the same room and breaking down barriers to communication. The time spent by a mediator encouraging parties to explore their own needs, as well as those of the other party, enables participants in mediation to make practical proposals. Such offers may have added-value as they may have huge significance to one party but can be provided with minimal inconvenience to the other. It may involve looking at previously unconsidered options and widening the options for agreement.

The Property Ombudsman offers free, impartial and independent service for the resolution of unresolved disputes between consumers and property agents. The scheme has been providing consumers and property agents with an alternative dispute resolution service for 27 years. A member agent signed up with The Property Ombudsman is obliged to adhere to a code of practice which consumers can take confidence from.

Factors influencing property development

Deciding to become a property developer as a vocation is an important decision that requires various considerations before you take the plunge.

Developing a property in poor condition as basis for a successful business venture which gives a sound return on investment requires a lot of energy, time, money and luck. How much energy, time and money are required multiplies with an increase in the scope and level of activities. If you move from developing a large, Victorian property to two properties, or more, the demands rise commensurately.

Using project management ideas to succeed – the feat of managing a project based development process, whether of a single Victorian house, a single larger scheme, an old warehouse conversion to provide dwelling units for 20 people, as in for example, a block of flats being adapted for Home in Multiple Occupation (HMO, each require the application of the same basic principles. Even when the challenge is that of working on two sites simultaneously, sites, which are next door to each other, you still need lots of energy. The point of note here is that, each of these scenarios will pose their own challenge.

For some, these challenges can sometimes prove so daunting, that developers with years of experience get into trouble, which is when, some take appropriate, corrective measures and the result can be survival from where they rebuild and live to tell the tale. Others may not be so lucky and go under. You have to keep your eye on the ball in relation to the factors which will help you to not only avoid going down but to move from one successful development project to another. This said I am reminded of the old Chinese saying which goes something like; the glory is not in not falling but in rising even higher after any fall.

When it comes to property investment, as with other times, location and unrealised, hidden values hold the key to success in this business. Furthermore, in a UK context, London and the south of England, are the ultimate magnet for property developers. This is an area consistently identified as offering ideal investment returns on account of; development opportunities, the high rents achievable and the considerable capital appreciation over time are all contributory factors. Demand and supply factors, which favour the developer’s side of the equation, have contributed in no small way to property price appreciation over the last three decades and more, with supply unable to match or catch up with demand in over three decades, especially since the 1990s.

Spreading London ripple effect – what is often referred to as the ‘London ripple effect’ in relation to high prices always sees the higher London price rises, spread to the surrounding regions and beyond. Such ripple effect is dependent on the prevailing economic climate of the time. Examples abound of out-of-London property hotspots like Birmingham, Manchester, Liverpool and Leeds to list a few.

Scotland and Wales Farmers’ diversification into the market for holiday accommodation – for a couple of decades now, it has been noticed that in locations far removed from the hustle and bustle of city life, for example in Scotland and Wales, areas which have not witnessed property price increases, like those found in the south of England, farmers have included diversification from core farming activities into providing accommodation for tourists. For the farmers who have taken advantage of the opportunities opened by tourism, refurbishing old barns and disused farm cottages has become an established strategic route to generating additional revenues. This has to be seen in the context of dwindling grants and subsidies, formerly built into the income streams of members of the farming communities. It is as much driven by political pressures and dwindling government support as by the survival exigencies of the day. You can be sure that where there is a development tag attached, you will soon find a property developer knocking on the door. Could that developer be you in the near future?

Scotland and the City of Aberdeen and surrounding districts – still on Scotland, there had, until recently, over several decades, been intense development activities in and around the city of Aberdeen. This relates to Aberdeen being at the centre of Scotland’s oil industry, with people coming to work in the industry or to study about different aspects of the oil industry at Aberdeen University and the surrounding colleges.

Supply demand factors as drivers – in Aberdeen once more demand – supply factors act as drivers and according to 1st quarter figures from the Halifax Price index, annual price rises in Scotland stand at 9.3%, in August 2016, while that for the UK as a whole is 10.1%. A check on house prices in Aberdeen and its surrounding districts, relating to different types of housing; flats, period properties and new builds, prices are comparable to those in some areas around Greater London. A fact, which may come as a surprise to many of us, cocooned as we are in our city life bubble. The government estimates a shortfall of 3 million homes exists at the present time.

Scotland and the cities of Glasgow and Edinburgh – the cities of Glasgow and Edinburgh, between them have a combined population of just over a million, and 8 universities, four in each city and several colleges in their patch. There has always been a steady hive of development activity by which students’ accommodation needs have been catered for. Over several decades developers and buy to let investors busy themselves working the students’ districts assiduously.

Ever present opportunities – there are constantly emerging development opportunities, which can be capitalised on, if you’re at the right place at the right time, and for those who know their patch, and are also known, they are first to be notified, when opportunities suddenly crop up. And the elephant in the room requires that you be financially ready to take advantage of such opportunities when they arise. These are hallmarks of discerning developers.

The feel good factor as relates to the property market, may come and go and irrespective of the state of the market, opportunities are always there, explained another. When asked about the negative equity phenomenon, one property developer’s response was that the phenomenon which descended on the property market in the late 80’s and early 90’s is a distant memory, and long forgotten. Negative equity was the term coined for properties losing their value – even overnight properties became worth far less than had been paid for them just a few weeks before.

Negative equity may well be a distant memory. However, it serves to remind us that while the last forty years have seen steady property price increases averaging over 9% annually it is worth stressing once more that property prices can go up but they can also come down. A cautionary tale: as distant memory it may be, but it serves to remind us that whilst the last forty years has seen steady property price increases, averaging over 9% annually, it’s worth stressing that property prices can go up as well as come down.

Healthy employment figures – among the many factors impacting on the property market, are recent UK employment figures, (August 2016) which show a high proportion of people in work compared to the years 2007-2010. The importance of healthy employment figures to the property development process lie in its relationship with other factors which impact on the market for materials, labour and income.

Traditionally, factors such as interest rates reflect the state of the market in relation to supply and demand and its impact on the property market. Interest rates is a subject to which we will return later. The simplest relationship which can be adduced is that higher labour costs can lead to higher incomes for the working population. Improved incomes in turn mean those who wish to purchase properties; flats or houses are better able to afford them.

A dynamic market is good for development – a corollary of the above, is this; the greater affordability made possible for those purchasing in any segment of the market; low, high or in the middle, the more dynamic the market is, the better it is for the developer. It means the greater the numbers of people in the market well placed to afford to purchase properties, the likelier the chances the developer has for a quick sale and turnaround, followed by a move to the next project.

A developer who takes too much of a narrow perspective, may end up paying the price, as a result of the adverse consequences which may result from ignoring details from other perspectives, even when such details are minute. For example, using wrong structural engineering calculations or failure to take account of small recommended measurements because the builder thinks you could get away with not doing so. When the correct details are ignored and corners cut, they can result in unstable structures, which end up imperilling thousands of pounds of development investment.

Property development is much like any other economic activity; retailing, banking, running or hotel or any of the businesses we see on the high street. Each one of these businesses requires coordination of human, raw materials and financial resources with the latter acting as the glue that holds the business together.

Deciding to become a property developer is an important decision. There are many considerations to be undertaken beforehand, and during the process. But done correctly, it may be rewarding, both financially and vocationally.

Making it as an estate agent in a world of dwindling commissions

If you are an estate agent, and have been at it for a fair while, you may remember the days when a commission of 2-3% for each sale of property was pretty standard. Then as the years went by you may recall how this figure gradually dwindled by percentages, almost like the Bank of England base rate, until it gradually became as low as 1%.

And just when you thought it couldn’t get any lower, the internet continued to slash commissions further, and periodically you had to do special promotions to get people to list their properties with you.

Could margins be squeezed any tighter? It certainly seems so. A quick Google search for the term “estate agents” will now see online agents offering to sell for fixed rates of around £650, or offering no sale no fee guarantees. How can you make it as a property agent?

Determine your minimum
The first thing you must firmly establish, and hold on to, is the minimum sum you want to make from each property sale. Never let the client bargain you down below that figure, even if they say there is another agent they are considering. If you go below what you can accept, you will find yourself unmotivated to make the sale, or to arrange property viewings. In other words, if you accept less than what you normally would, the property is a white elephant on your books, and would only take up display space in your store front. You might as well not bother. And if you show you can be pushed, you will only attract the kind of clients who want to squeeze out every pound’s worth out of you, never mind that you are already working at the bare minimum.

Emphasise what you can offer
Even if you commission rate is higher than other agents in your area, or more than the fixed fee online agents, all is not lost. You are hardly disadvantaged. Mention what you can offer for the price you charge. After all, it is not the lowest price that is important, it is value for money that people go for when it comes to deciding which estate agent to list with. In other words, if you charge more than the other agents, make sure you show how you can offer more.

Play to your strengths
Competing against an online agent? Emphasise your local presence. Emphasise to a potential client how they can walk in to your branch to chat about the property sales progress. They can’t do that with an online agent. An online agent may be willing to respond to emails, but mention how a prospective buyer can walk to your branch, discuss the property for sale and see it all in one fluid motion. You can’t do that with an online estate agent.

How do you compete with other estate agents? Find a way to use facts to your advantage. If a prospective client mentions your lack of clientele as an indication of a lack of trust, suggest how it means you will be more focussed on selling their property. If a client worries about listing with you because you have too many properties on your books, mention how your branch attracts large number of buyers because of this and the right buyer will come along.

Also emphasise your experience if it is an advantage. Show how knowledgeable you are in your field or in other areas. Always take the change to demonstrate your knowledge beyond the immediate sale, to show the buyer or seller you know about things such as flying freeholds or right to manage.

Be more prominent in your local community
Know any local events? Sponsor a stall or an annual fun run. Some estate agents sponsor school summer fairs. But why not sponsor a monthly competition, such as an art or story writing competition, where the prize is a grocery shopping voucher? Have different categories for children and adults. Parents will be urging their children to enter, and adults will be trying their luck in their own category too. Every one will be talking about your competition, and you’ll be the buzz of the town!

Or sponsor a singing competition or talent competition at a local fete where the judges are prominent members of the community. You can be fairly creative with your efforts and generate a great deal of publicity for yourself in the process!

It may pay to be more involved in your community. Elderly buyers will come to recognise your brand as a mark of trust. A word about trust though – make sure your practices build on these too. For example, try to avoid using sealed bids as a means of eliciting an offer from a group of bidders, because it leaves all but one buyer disappointed, and if you become known as the “sealed bid” estate agents for resorting to it, it does your name no good.

Be personable
Being an estate agent doesn’t mean sitting at your computer, checking emails, editing listings of properties or checking social media accounts. Get out there and be seen. Buying a newspaper? Chat to your newsagent. Make sure the people in the community know who you are by your live presence, and not just your avatar or twitter handle!

Some things to consider before investing in commercial property

Commercial property is property that is not designed or used for residential purposes, or for purposes associated with the primary industries such as agriculture and mining. The three main types of commercial property are offices (single office buildings and business parks), retail (individual shops, shopping centres, retail warehouses and supermarkets) and industrial (factories, warehouses and distribution centres). The remaining properties are those used for leisure (pubs, restaurants and hotels), sport, education, the provision of utilities and healthcare (hospitals and nursing homes).

The value of UK commercial property at the end of 2015 was £ 871 billion, about 10% of national net wealth, almost half of the value of government bonds and 40 % of the UK’s stock market. Within that figure of £ 871 billion, retail accounted for £ 360 billion (41%), offices £ 270 billion (31%), industrial £ 168 billion (19%) and other commercial properties £ 73 billion (9%). Commercial property activities employed almost 1 million people and the sector contributed about £ 68 billion (4.1%) to the UK’s Gross Value Added. (The figures quoted are taken from the Property Data Report 2016, produced by eight members of the Property Industry Alliance.) Although the residential property sector is over six times larger (by value) than the commercial property sector, the vast majority of residential properties are owned by private householders, so there is not as much scope for residential property investment as there is for commercial property investment.

About 45% of all commercial property is bought by owner-occupiers, who need land and buildings from which to conduct their business. Some of these occupiers want to buy a freehold or long leasehold interest in the property because they need certainty and complete freedom to deal with the property as the business dictates, but it does means that a lot of capital is tied up in the building. Other occupiers prefer to take a so-called ‘rack rent lease ’, where the occupation cost is paid, usually quarterly, over the period of the lease by way of rent, rather than all at the beginning. In recent years, particularly among the large food retailers, there has been a move away from freehold ownership through ‘sale and leaseback’, where the freehold interest in the property is sold to an investor (thus releasing capital for use in the operating part of the business) and the occupier takes a rack rent lease instead.

The other 55% of all commercial property is bought by investors, who buy property to let out to others so that they can make an income from the rent and a profit from any increase in the capital value of the property. Although the capital value of commercial property suffered a considerable fall in 2007 and 2008, it remains popular with certain types of investor because the average lease offers an income stream of about seven years. So the income return (or ‘yield’) from commercial property is reasonable (13.1% for directly-owned commercial property in 2015, better than UK equities and bonds). Over the 44 years prior to 2015, commercial property produced annualised returns of almost 10.9%, somewhere between gilts and equities (see page 18 of the Property Data Report 2016). Commercial property has tended not to track the performance of gilts and equities particularly closely, so including some commercial property in your investment portfolio is a way of diversifying and spreading risk. Moreover, by good management of tenants and/ or refurbishment of a tired building, a property investor may be able to enhance the value of the asset, even in times of economic downturn.

There are two ways to invest in commercial property, directly or indirectly. Direct property investment involves buying a property in your own name or in the name of a group company, letting it out, taking responsibility for managing it and selling it on when you no longer require it. Although you can employ surveyors and other professionals to assist you, this still uses up a considerable amount of time and effort. It also means that you have to find a considerable amount of cash, or a loan, or a combination of both, to fund the initial purchase. An alternative way is to buy shares or units in a company that invests in a range of commercial and residential property, such as a real estate investment trust (REIT) or an offshore property unit trust (PUT). These indirect property investment vehicles offer opportunities for smaller levels of investment, some taxation advantages, less management responsibility and, arguably, greater flexibility as it may be easier to trade units than to sell a property. However, indirect property investment is beyond the scope of this book.

So who invests in commercial property? According to figures in the Property Data Report 2016, overseas investors held the largest block of directly-owned investment property (28%); UK insurance companies and pension funds held 17%; UK collective investment schemes held 16%; UK REITs and listed property companies held 15%; and UK private property companies held 12%. Traditional estates and charities and private investors held 5% and 3% respectively. Some of the units in the UK collective investment schemes are bought by private individuals, but many are bought by the investors who also buy property directly. For example, in 2015 the UK insurance companies and pension funds invested £ 84 billion (2.8% of their total investments) in directly owned UK property, £ 57 billion (1.9%) in collective investment schemes and £ 37 billion (1.2%) in UK and overseas property company shares.

Buying a leasehold property? Understanding a bit more about leases

A lease is a legal term used in property law to describe a particular type of property contract. In many respects, a lease is similar to any other type of contract: it is a written agreement between two or more parties recording the basis on which the bargain between those parties has been agreed. Although, in practice, leaseholders may feel that they did not have much bargaining power when agreeing the terms of their lease, in law, the lease is a written record between the two parties reflecting their agreed relationship.

Usually, the leaseholder will pay the freeholder a sum of money (“consideration”) in return for the exclusive use of the property. This will be in addition to any other sums that the leaseholder may have to pay during the course of the lease. Such charges (of which service-charges – see Chapter 3 – are one example) will themselves be governed by the terms of the lease.

The usual parties to a lease are the lessee (the leaseholder) and the Lessor (commonly the “freeholder” or “landlord”). In some cases, tripartite leases include the management company too. These are commonly set up by the developer in new-build blocks of flats as a method of securing the management for as long as possible. If the lessees are dissatisfied with the management of the building, tripartite leases make it more difficult to change the management. Ultimately, this would be a lengthy and potentially costly process. Finally, there are some buildings where a separate lease has been granted to the managing agents of the common parts alone. Situations such as these can also cause difficulties for the leaseholders when faced with unsatisfactory management. The solution in such circumstances is for the lessees to exercise their collective right of enfranchisement and purchase the freehold. Recent guidance from the Leasehold Advisory Service (LEASE) advises purchasers of flats to investigate the parties to the lease in advance and to consider with care any purchase involving a tripartite lease or a building where the common parts have a separate lease.

In simple terms, a lease grants the leaseholder the right to enjoy the exclusive use of a property for a fixed period of time, and it is conditional upon the observance of certain express and implied terms contained within the lease itself. Leases come in different lengths commonly 99 years, 125 years or nowadays even 999 years (sometimes also referred to as “virtual freehold”). When the time prescribed by the lease expires, the ownership of the property reverts back to the freeholder (called “freehold reversion”). The freeholder is then at liberty to deal with the property as he pleases (which may include the grant of a new lease). The freeholder is sometimes referred to as having a “reversionary interest” in the property, meaning the freeholder’s right to take possession of the property on expiry of the lease term. A reversionary interest is a valuable asset that can be traded.

If your lease is about to expire, do not panic! It is unlikely you will be automatically turfed out into the street. Rather, the law (which is primarily contained in Schedule 10 to the Local Government and Housing Act 1989) will usually provide you with an opportunity to remain in occupation as a tenant. More commonly, however, you will have the opportunity to negotiate the purchase of your freehold or negotiate an extension of your lease. Although the law will afford you some protection in these circumstances, it is a technical and specialised area and it is advisable to seek professional legal advice.

At this point, it is extremely important to highlight a common misconception often held by leaseholders: a lease does not provide the leaseholder with entire ownership of the property. If there is only one piece of information you remember from reading this book, then that should be it. All a leaseholder “owns’ is the lease contract; the property is ultimately owned by the freeholder. Shocking as it may seem, a leaseholder only has the right to use the property that is the subject of the lease for the period of time prescribed in the lease. The length of the lease can be spotted when reading the lease by the words “to hold” which will be located nearby. Think of a lease as a form of “virtual ownership” of the property for a period defined by the lease length, accompanied by legal protection of the leaseholder’s enjoyment of the use of the property during the lease term.

Leases are valuable assets. They can be bought and sold for significant sums of money. Despite the imperfections of the leasehold system, some leases are worth millions of pounds. When a lease is sold, it will need to be “assigned” to the new owner.

Commercial – Guidance and Information

If you’re one of the many that have ever considered running your own business and working for yourself, you may – depending on the nature of your business – need commercial premises. A commercial premise is a place from where you run your business, and is the opposite of a residential property, although if you work from home (such as some tutors) then the lines can be blurred!

Commercial premises are usually leased initially, although if your business becomes big enough you may wish to buy the freehold or a permanent location. But the assumption is you move from considering leasehold to considering freehold. For many businesses the latter step is one they never make because the outlay to buying a permanent property is too large. But whether you are leasing or buying a commercial property, there is enough jargon to befuddle you at the outset. Fortunately, here is a guide to help you get to grips with the terms.

 

What is “Alienation”?

Alienation is the legal transfer of title of ownership to another party.

 

What happens with “Assignment” of a lease?

Assignment of a lease is where the tenant transfers/sells its interest in the property for the unexpired term of the lease to an assignee.

 

What is an “Authorised Guarantee”?

An agreement an outgoing tenant enters into with the landlord when it assigns its lease to a new tenant. Under the agreement, the outgoing tenant guarantees the performance of the covenants by the new tenant. The outgoing tenant therefore becomes the guarantor for the new tenant.

 

What are Business Rates and who collects them?

Business rates are a business tax for occupiers of non-domestic property, collected and managed by the local council.

 

What is a “Break Clause”? (If you are a football fan, chances are you’ll already know this!)

A break clause (or a ‘break option’ or ‘option to determine’) is a clause in a lease which provides the landlord or tenant with a right to terminate the lease before its contractual expiry date, if certain criteria are met.

 

What is the “Break Notice”?

A break notice is the formal notification that one party wishes to exercise its right to terminate the lease in accordance with a break clause. Notices must be drafted with care, taking into account compliance with any pre-conditions, to ensure the right is successfully exercised.

 

What does it mean to “Contract Out” and why does it happen?

The parties to a lease may, by agreement, contract out of the Landlord & Tenant Act 1954 with the main consequence being to remove the tenant’s rights of renewal, and eligibility for compensation in certain circumstances (e.g. landlord’s redevelopment ).

 

What are “Covenants”?

Covenants in a lease refer to the obligations imposed on each party by the various clauses.

 

What are “Dilapidations”?

Dilapidations are the potential breaches of a tenant’s lease covenants in respect of repair, reinstatement of alterations, and redecoration. These can be raised by a landlord during the term of the lease or at lease expiry.

 

What is an “Estate Charge” and who levies it?

Part of the tenant’s service charge liability relating to the maintenance of the estate on which a commercial property is situated. The landlord normally imposes it on the tenant – think of it as a service charge for commercial properties.

 

What is meant by “Exceptions and Reservations”?

These are areas that would otherwise form part of the property but are not included in the lease.

 

What is “Forfeiture” and who has the right to it?

When a business tenant is in rent arrears or in serious breach of the lease terms, then the commercial landlord will in most cases have the right to forfeit – the right to summarily end the tenancy. The landlord must, however, comply with relevant legislation when exercising this right.

 

Full Repairing and Insuring (FRI) – who is responsible?

FRI is a term used to describe a lease where the tenant is responsible for all repairs and for insuring. The term also applies to the liability for payment of these costs. FRI leases can therefore include terms where the landlord pays for external repairs and insurance and recovers the cost from the tenant usually via a service charge.

 

What is meant by “Gross Income”?

This is one of the terms any business must acquaint themselves with. This is the total current income receivable from a property investment before allowing for any deductions.

 

What is “Gross Internal Area”?

Gross internal area refers to the total area within the perimeter walls of a property and makes no allowance for the space occupied by staircases, walls, etc. This measurement is the standard measurement given for industrial property. It gives you a rough idea of the space available for the running of your business, but if there are prominent features like large walls or spiral staircases, then these will eat into the area.

 

What does “Guarantee” mean?

An agreement whereby a third party is liable to pay the tenant’s debts, or carry out their duties, if the tenant fails to do so. The person that gives the guarantee is the tenant’s guarantor.

 

Who is the Head or Superior Landlord?

The person who is landlord to the tenant’s landlord (see freehold).

 

What are Heads of Terms and why are they necessary?

Heads of terms agreements record the requirements of both the transacting parties in the property transaction. It is designed for both parties to fully understand what they are subject to, and reduce any misunderstandings. The heads of terms form the basis of the eventual contract and will be passed to the parties’ solicitors tasked with drafting the contract or lease.

 

What is Indexation?

The practice of linking tenant payments under the lease to a published index, such as the Retail Price Index (RPI) or the Consumer Price Index (CPI). Mainly associated with service charge payments and rent reviews. This is to ensure that the payments rise in accordance with other societal rates. While fixed payment rates are sometimes used, landlords will more commonly use indexation.

 

What is an Internal Repairing Lease (IRL) and how is it different from an FRI?

Unlike a FRI lease, the landlord retains responsibility and financial liability for the cost of external repairs.

 

Who is the Landlord?

The person who grants the lease or who now has the right to enforce the terms of the lease. Be sure you are aware of how this is different from the head or superior landlord!

 

Why is a Lease necessary?

A legally binding contract between a landlord and a tenant which sets out the basis on which the tenant is permitted to occupy a property.

 

What is “Lease Surrender”?

An agreement whereby the parties bring a lease to an end other than by contractual expiry or use of a break option. This can often involve negotiation of a premium or rely on a mutually beneficial surrender. Lease surrender can occur at the early renewal of a lease, when one lease is surrendered and another one is drawn up.

 

What is a “Lessee”?

The legal term for ‘tenant’.

 

Who is the “Lessor”?

The lessor is the legal term for ‘landlord’.

 

What is the role of a Managing Agent?

A managing agent is the party instructed to oversee the property by the property owner or landlord. Managing agents have varying responsibilities, from maintenance and repair management to rent and service charge collection.

 

What are “Market Rent” and “Market Value”?

Market rent is the estimated amount for which a property could be leased. The market value is the estimated amount for which a property could be sold.

 

What is “Net Income”?

The income from a property investment after deductions for ground rent and non-recoverable expenditure.

 

What does “Net Internal Area” mean?

The ‘useable’ measured internal floor area of a building. It is the gross internal area minus unusable floor areas such as stairwells and walls.

 

How is “Net Yield” calculated?

Takes the assumed or actual costs associated with purchasing the property into account to produce a figure in respect of the relationship between the rental income and the total capital investment.

 

Open Market Rent

The most common basis of valuation at rent review (also known as open market rental value – OMRV). Defined as the rent at which the premises might reasonably be expected to let, in the open market, at the review date, on the terms of the hypothetical lease.

 

Overage – definitely not what you might think!

Overage (also known as ‘clawback’) concerns the right to receive future payments triggered by future events. Achieving planning permission for change of use or development, practical completion of a development, or the sale or lease of the completed development are potential events that could trigger an overage clause in a lease.

 

What is a “Premium”?

The price paid for a lease, in the open market, where one tenant assigns its interest to another, replacement tenant.

 

What does “Quiet Enjoyment” mean?

This is a term entitling the tenant to operate the premises without interference from the landlord.

 

Rateable Value

The assessment required of non-domestic property to represent the rental value at a prescribed valuation date, subject to assumptions about repair on a full repairing and insuring basis.

 

What does “Reinstatement” refer to?

Refers to the tenant’s liability to remove its alterations at lease expiry, reinstating the property back to its condition at lease commencement.

 

Rent

The amount the tenant pays regularly to use the Property.

 

What is “Rent Review” and when does it occur?

A periodic review of rent during the term of a lease. Rent review clauses often require an assessment of market rent at the review date, but some incorporate other factors, such as the movement in the Retail Price Index.

 

What is the Rent Review Memorandum?

Records the outcome of the rent review process, whether the review is settled by agreement or arbitration / independent expert determination. It identifies the lease, the review provisions and both the original and current parties, recording the amount and effective date of any revised rent. It may either be annexed to the lease or retained with each party’s deed packet as a separate document.

 

What is the purpose of the Repair Notice?

Usually taking the form of an interim schedule of dilapidations, the intention of the notice is to highlight breaches of the lease to both the landlord and the tenant.

 

What is the “Schedule of Condition” for?

This is a record of the condition of property at the commencement of a lease. This is so that any damage arising later can be properly assessed.

 

Schedule of Dilapidations

This is a list of outstanding repair and maintenance items that have accrued under the terms of a tenant’s repair and maintenance obligations.

 

Security of Tenure

Unless the parties have ‘contracted out of the Landlord and Tenant Act 1954, tenants of commercial premises have the right to remain in occupation, and to a new tenancy on terms prescribed under the L&TA legislation. Also known as ‘lease security’.

 

Service Charge

Payable by a tenant for services provided in relation to the repair and maintenance of common parts.

 

Who imposes Stamp Duty Land Tax and who pays it?

A government fixed tax, chargeable on the execution of documents, relating to transactions such as leases, agreements for leases and conveyances. The duty is payable by the purchaser or lessee.

 

Sub-letting

Where a tenant grants a new lease for the property, or part thereof, to an alternative occupier, for a period less than the residue of the tenant’s lease.

 

Tenant

The tenant is the person who rents the property from the Landlord. Also referred to as ‘Lessee’ or even ‘leaseholder’.

 

What is the “Term”?

Also known as “Lease Period”, this is how long the property is to be rented for.

 

Transfer of a Going Concern

A mechanism used on the sale of a property investment where VAT is chargeable but not actually payable. It is only applicable where the asset is and remains income producing after the transaction.

 

What is “Vacant Possession”?

A term denoting the empty state of a property.

 

Without Prejudice

A legal term used in negotiations and correspondence meaning that anything said, or offers made cannot be subject to forced disclosure in the event of litigation or arbitration.