Commercial property landlords can avoid the empty clone town close downs –says Simon Murphy, property partner at leading law firm Taylor Vinters
While the public is reeling from the recent demise of UK stalwarts HMV, Blockbuster and Jessops, local authorities and landlords have been put on notice that more closings may occur in these tough economic times.
However, there are some entrepreneurial and innovative things that commercial landlords can do to prepare for the worst effects of closing-down tenants, ensuring that they – and the future of the UK high street – remain viable in the medium-to-long term.
Landlords as commercial partners
It is not only local authorities who are responsible for ensuring towns and cities remain vibrant economic areas; landlords play a crucial role also. This means helping to keep rental voids to a minimum, not easy in these recessionary times.
In fact, since 2007, the maxim on tenant covenant strength no longer holds true, as increasing numbers of retailers become insolvent – including those that only a few years ago would have enjoyed an excellent Dunn & Bradstreet score.
This all highlights the necessity for landlords to take a much more inventive approach to their choice of tenant.
Landlords need to become business advisers in this low-growth, hi-tech environment and consider whether a proposed tenant’s business is truly viable. Landlords of smaller premises, with lower loan-to-value ratios, may be better advised to take a risk on an innovative and quirky business start-up, which is likely to be more viable in the long term, than a high street stalwart whose star has waned.
Don’t overlook the beginner
Start-up companies will find it hard to prove high covenant strength or provide a significant rent deposit, but risk can be kept to a minimum by allowing the tenant to pay monthly for the first year or so. This will mean that if the tenant goes into administration, and administrators use the premises for the purposes of the administration, then the next rent payment date will at worst fall a few weeks after the date of the administration; in which case there will not be three months to wait before any further rent arrives.
In addition, if the tenant defaults, the lease can be forfeited more quickly than if rent is payable quarterly. Obviously, this places an administrative burden on the landlord and does not satisfy many lenders’ requirements, but it does reduce risk.
While it may be a high-risk gamble to install a start-up tenant – with their low covenant strength and no rent deposit in valuable premises – landlords can write safeguards into their leases to protect asset values.
Indeed today’s commercial landlords should consider carefully whether a declining blue-chip retail tenant is really the best way of maintaining asset values in the long term. Even if the worst happens and the start-up fails, at least some expensive business rates will have been avoided.
One of the main problems today is that usage of the High Street has changed, with many of them no longer considered by consumers to be ‘destination locations.’ This has had a profound impact on towns and cities, which work hard to overcome this new reality.
Commercial landlords can help by ensuring that their buildings in key city streets are kept in a good state of repair. While landlords are often minded not to pressure tenants to comply with their repairing obligations when the tenant’s business is waning, this may amount to an ‘own goal’ for the landlord. A landlord is much more likely to have a longer rental void with dilapidated premises than with a property that is in premium condition.
Landlords can proactively manage their tenants’ repairing obligations by serving interim schedules of dilapidations, and by exercising rights of entry, carrying out the repairs themselves and charging tenants the cost as a debt. Even if the tenant cannot pay immediately, at least the landlord will own property that is more likely to be attractive to an incoming tenant.
In that important partnership between town planners and commercial entities, the landlord will have successfully helped to keep the town centre as viable and vibrant as possible.
Even where a premise has been vacant for months or even years, and no interest has been shown by potential tenants, landlords need to proactively manage these assets in conjunction with planning advisers and the local authority. It may be that there is an alternative solution available, one that avoids paying empty property business rates, eventually bringing the property back into some sort of alternative use.
Creating a destination location
With some strategy and foresight, commercial landlords can act as key players in helping to create ‘destination locations’ and even ‘destination towns’, attracting shoppers, residents and commercial entities – some of the start-ups – to populate the high street.
Holt in Norfolk and Totnes in Devon are prime examples. There you’ll find a vibrancy and stability that is aided by flexible and innovative commercial landlords working with town officials to avoid yet another UK clone town.
“Landlords of smaller premises may be better advised to take a risk on an innovative and quirky business start-up – than a high street stalwart whose star has waned.”
Simon Murphy is as a property management partner at Taylor Vinters, with specialism in commercial property portfolio management.