When a business tenant says they cannot afford more rent, often it’s not a genuine claim. Or not for the right reason. The right reason is that despite the tenant’s utmost attempts its business is not trading profitably. The wrong reason is that the business has been starved of cash to fund the tenant’s life-style and there isn’t enough money for both.
Use of the premises is for the tenant’s business. Unless the permitted use in the lease is restricted to the tenant’s particular style of business, the tenant’s modus operandi is irrelevant. The tenant having decided upon a course is not bound to that choice but frequently the capital commitment including any bank loan or borrowing is the limiting factor. A business plan is rarely straightforward; attitude must be flexible, to remain in sync with change and welcome the opportunities that change presents. On the ball, the minimum, is the least risky so the most competitive. The big profits come from anticipating what people will want in future and being there to provide it. For landlords too, investment is about the future, so investors that are themselves forward-thinking or whose advisers are forward-thinking will likely be more successful.
To be left behind is to miss out. Whether possible to catch up or overtake depends upon the demand for the particular product or service, and style of business. Style is not simply physical appearance and surroundings but also psychological state and atmosphere in relationship and communication: success reflects the attitudes of the people in charge, managers and staff. For all businesses, the profit margin involves working the same principle: the difference between what it costs the business in overheads and operating costs and how much the business can charge customers. Margin can be increased or at least maintained by maximising prices and minimising costs. A combination of both is rarely possible, competition sees to that.
Even a moderately successful business will generates excess cash, surplus to operational requirements. The secret of success is how the business is managed behind-the-scenes. A well-managed business, presupposing a long-term objective, will have ample reserves to tide it through both rising costs and downturns in its market. In the commercial property market, bigger companies dominate the headlines but smaller businesses make up the bulk. For smaller business, the daily reality of the markets those businesses operate in is often thought representative of the whole. Market conditions, the state of the economy, are cited as reasons for not being able to afford more. Big business can load up with debt and creative accounting hides the nasties deep in the balance sheet. Amongst small businesses, lacking resources that big companies take for granted, there can be a tendency to think, after the novelty wears off, that the business potential limited, so surplus cash is not invested in the development of the business but spent on personal life-style.
Experience can spot the signs immediately. An under-capitalised business is not appealing to customers. When most of the seed-capital goes into buying a previous tenant’s dream or starting from scratch and getting off the ground, it doesn’t take much for the school of hard knocks to deliver a blow to enthusiasm. Once hard graft is called for, and with it a perception of limited trading potential, an equivalent to comfort eating is to want a life-style commensurate with being seen able to keep up with contemporaries.
It is said that the older we get the more likely we are to become stuck in our ways. Stuck is a reflection of tangible life-style, not attitude. The pivot upon which thought and feeling revolve, attitude itself remains flexible regardless. Our ability to change is not lost merely because we choose not to. When the cost of maintaining an existing life-style becomes pressing, a difference in attitude can arise between the business needs and unrelated expenditure. Whenever affordability is mentioned, more often than not the real reason is nothing to do with the business itself, but because the life-style the tenant’s business supports is above the tenant’s station in life.
To the question whether investment performance and landlord’s life-style is more important than the tenant’s survival, amongst the answers to be sociable are that the tenant’s business might be a source of employment, another empty property is to be avoided, a landlord shouldn’t be greedy, and so on. From the landlord’s perspective, why a landlord should refuse to be accommodating came to the fore when discussion about monthly rents was novel and tenants realised that landlords also have commitments, such as mortgages. Most tenants do not see it like that: a tendency to think the world owes them a living, to blame anything and everyone else for their own shortcomings. An interesting aspect of behavioural psychology is for some tenants to see themselves as victim to on-line competition when presumably there is nothing to prevent them from also transacting on-line. Amongst the reasons for those of the limited imagination is the age of the tenant. There is an underlying assumption that even if landlords cannot afford to concede, they should do regardless.
The number of tenants having what it takes to overcome adversity in the markets in which their businesses operate is relatively few. For the majority for whom affordability is a big issue, the question at rent review and for lease renewal is who goes first? Should landlords accept unconditionally what tenants claim about the market conditions the tenant’s business is in or should tenants prop up their businesses by lowering their sights and reducing the cost of life-style. I suppose the answer is whether one can afford to be generous.
Whether landlords want to be accommodating is I suggest a matter for discretion after the rent review is agreed or ascertained, not before. To dive straight into discretion before agreeing or ascertaining the market rent is not the way to establish the truth. For landlords, the choice is either investment performance and take a chance or giving in and subsidising the tenant’s life style.
The Rent Review Specialist