By Laura O'Donovan BSc(Hons) MA PGDipSurv MRICS, Head of Building Surveying
When taking on a business premises lease, many people are unaware that the building surveyor's role is one of the most important aspects of the property transaction and will safeguard against problems further down the line by limiting liabilities and potentially saving money for the business owner.
Commercial property leases differ from residential property leases and are typically viewed as contracts between 'knowledgeable business people'. Therefore less protection is available for tenants of commercial property than tenants of residential property. There is an assumption that 'knowledgeable business people' should be able to negotiate the terms of the lease accordingly.
Commercial leases are often full repairing and insuring (FRI) leases where all the costs of maintenance and repair, as well as insurance, are the responsibility of the tenant. This can have far reaching financial implications for the tenant who may be unaware of these obligations at the outset.
The building surveyor can undertake a building survey and provide a detailed report on the condition of a building prior to the lease, in order to identify and analyse defects and suggest necessary repairs. The building surveyor can also review the draft lease to provide advice on the extent of the repairing and decorating liabilities, and help the tenant to understand the implications of these covenants as well as advise on an achievable exit strategy when the lease is ending. This foresight could
Tenants often sign FRI leases on buildings that are in disrepair believing they can hand back the property in the same condition. We recommend that agreement is sought to append a Schedule of Condition to the lease in order to record the true and accurate condition of every part of the property. The repairing obligations of the tenant can then be limited to the condition of the property at the beginning of the lease. The building surveyor has the skills, knowledge and experience to identify priority areas that would afford the most cost savings in the long term.
Tenants must understand the implications of the lease as a legal document into which they are tied for a number of years, so clients taking on commercial leases would be well advised to consider an appropriate exit strategy which considers the future requirements of their business, as well as their current business requirements. This could include options for subletting, breaking the lease at a specified term or on the occurrence of certain specified events and surrender of the lease.
At the end of the lease term, the landlord or the surveyor will prepare a Schedule of Dilapidations in order to establish the breaches of covenants relating to dilapidations. If the breaches are not adequately remedied by the tenant, the landlord may undertake the work and recover the cost from the tenant. A building surveyor can assist the tenant by reviewing the landlord's claim and negotiating a settlement on the tenant's behalf.
In May the Labour Party announced that if it wins the next election it will ditch Permitted Development (PD) rights, where owners and developers can, within certain parameters, convert commercial property into residential accommodation without applying for full planning permission.
Labour says the policy has resulted in slum housing and many homes built using permitted development disregarding national space standards.
Permitted Development rights
Introduced in 2013 by the previous Conservative and Coalition Governments, PD rights was an attempt to free up inertia in a planning system that had been exacerbated by a dearth of local authority planning officers, which in turn had caused unacceptable delays on planning decisions.
From the outset 17 local authorities (including 11 London Boroughs) were granted an exemption to prevent office to residential conversion using PD rights1.
Listed building and various other properties are exempt under the rules of permitted development.
Experts at Caxtons Chartered Surveyors, one of the largest independent multi-disciplinary property firms in the South East, consider the potential impact that such a move might have on the market. It's a mixed bag.
Without dismissing the announcement as a politically motivated statement or just to gain a headline, it is an indication of ignorance about how the property market works.
The two main political parties have pledged to encourage building more residential properties to try and resolve the shortage of housing and the PD rights (which was originally a short term measure and subsequently extended) was designed to help by - at least partially - by-passing the long time delays and costs caused by the planning system. It is reported that PD rights has resulted in the creation of around 42,000 new homes, which would not otherwise have been created.
Whilst there is an argument that a minority of units created have been substandard, in my opinion the way to tackle this would be to impose mandatory minimum standards, rather than scrapping the scheme altogether.
Although PD rights has succeeded in adding to the housing stock and has removed a number of old and redundant office buildings, in some cases it has had the effect of removing perfectly serviceable offices from the market. In turn this has led to a shortage of office accommodation in some locations and has stifled business growth.
As with any government initiative, there have been downsides, although overall, the opinion of our valuer is that the introduction and refinement of PD rights has been successful.
The Commercial Agent
In Kent, PD rights and the re-purposing into a variety of residential variations of what were considered traditional commercial buildings has soaked up much of the surplus office, retail and other vacant premises. This has created an increased demand by commercial developers to fill the consequential void. Oversupply of office development has reduced – particularly in towns such as Maidstone - which in turn has made way for potential speculative development applications.
Going forward, the announcement from Labour will have little effect because the rate of conversion of properties from office to residential has slowed considerably and the 'low hanging fruit' has already been converted.
The Commercial Management and Investment specialist
If there is an early election and Labour succeeds in its endeavour to govern the country it will, on one hand, be a shame if they withdraw PD rights.
Many of our clients have benefited from this automatic grant of planning permission, which allows for certain building works and changes of use to be carried out without having to make a planning application.
Clients who have particularly gained are those who have converted vacant office space that has fallen behind current requirements that, without expensive and unrealistic refurbishment had rendered it un-lettable. Some of those properties were in areas of over-supply, so PD rights removed them from the office market, which has had little or no detrimental effect on local businesses.
More importantly many local authorities and home owners have benefitted from the resultant increased supply of our clients' good quality and much needed housing, mainly situated in well-connected locations close to public transport links, arterial roads or in some cases, in town centres.
A good example of this is a scheme at St James House, Canterbury. As an office, the property had been vacant for years prior to its conversion into 12 residential flats.
However, PD rights could and probably has been abused by unscrupulous developers, resulting in poor quality and poorly thought-through schemes slipping through the net.
Ultimately, conversions under PD rights still have to pass Building Control and local authorities be satisfied that any change of use does not have adverse impact on highways, waste management and environmental issues, so there is a degree of control albeit perhaps these need extending to space standards and other areas of concern. Perhaps Labour should review whether they are throwing the baby out with the bath water.
Overall the scheme has been pretty successful in bringing into use out-dated office buildings, providing much needed residential accommodation and re-populating town centres.
The conversion process has encouraged investment and employment. While it is true that in some areas – though certainly not all - offices supply has reduced, if this promotes new office development of buildings meeting contemporary requirements and in suitable locations, that is surely a good thing.
Office-to-residential conversions must comply with the same building regulations as any other development and whilst some of the units may be smaller than national space standards they may well appeal to many.
It is certainly true that extremely onerous planning restrictions and hoops to jump through make many potential developments unviable and a simplified planning process and lower costs will make it more likely these will go ahead.
A lot of suitable sites have now been converted so withdrawal of the scheme may not make a huge difference, but it will be a shame to see it go when across the board, in my view, we need less regulation not more!
It seems that experts at Caxtons agree this was a poorly thought through and ill-conceived policy announcement, made for the wrong reasons and with little regard to the problem is was designed to help to solve.
1 This exemption expired on 31st May 2019. According to media coverage, 15 of the 17 local authorities are taking measures to continue to prevent office-to-residential permitted development by introducing an Article 4 direction.
Last month, Homelet reported that ahead of the Tenant Fee Ban introduction rents were rising. Now that it's here, how are things panning out?
Their monthly Rental Index analysis revealed rents were, on average, up by 2% year-on-year for new tenancies across the UK, but the South East registered the greatest upward movement of 3.2% between March 2018 and 2019.
Since 1st June, letting agents can no longer charge tenant fees so time spent on administration and referencing – plus the associated charges - must either be absorbed by agents, or passed to their clients – the landlords.
So there is a general concern that rents will continue to rise to compensate for the additional cost to landlords. Alternatively, landlords will shut up shop and sell their buy-to-let property as and when they no longer provide a reasonable return on investment.
Relinquishing an investment property may seem drastic, but landlords have faced an onslaught of measures that have reduced their investment potential. In an attempt to encourage owner-occupiers and suppress the buy-to-let market, the government introduced a 3% stamp duty surcharge on rental property back in April 2016. Thus began the exodus from the sector. More recently, subsequent cuts in mortgage interest relief and expensive to implement energy efficiency legislation was the final straw for some of the 120,000 landlords who have departed the arena in just three years1.
On the positive side, landlords who sold realised an average profit (across the UK) of £80,000 per property.
With the Tenant Fee Ban now in force there is a financial cost that must be met, in many instances by increased fees charged by agents to landlords. Landlords will then face the difficult dilemma of either increasing rent – if feasible – or selling up. And both of those options have the same consequence... more expense for the tenant. If lessons of the past are anything to go by, less rental stock equals less choice and spiralling rents.
The Association of Residential Letting Agents (ARLA Propertymark) warns that the impending ban on Section 21 'no excuse' evictions will just compound the problem.
David Cox, CEO of ARLA said "In order to remain profitable, landlords will increase rents to cover the additional fees they are now faced with and as a result, tenants will continue to feel the burn."
The National Landlords Association (NLA) raises concerns that letting agents will try to cut costs wherever they can and may no longer provide client references for past tenants. One result of this could be that landlords breach some local licensing schemes that require tenant referencing prior to them moving in.
At one minute to midnight on 31st May the government published it's updated How to Rent Guide, which contains details of the tenant fees ban and Section 21 evictions procedure. It is important that tenants are given a copy of the updated guide to avoid problems going forward.
A knock on effect may be that letting agencies whether large – with larger overheads – or small with smaller portfolios, will lose revenue directly because of the ban, and will be driven to cut costs elsewhere by way of staffing levels. In an ideal world agencies may not want to pass on the costs to their landlord clients, but if their bottom line is impacted they may have to be more creative and recoup their costs as best they can.
However, agencies that have always striven to provide landlords with a first-rate management service at a realistic fee will be well placed to pitch for new business from those who are unhappy with agents passing on lost tenant fees.
Latest government estimates reveal the introduction of the Tenants Fee Ban could cost landlords up to £83m and letting agents £157m a year.
1 Earlier research conducted by Hamptons.