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What is today's blog about?
This blog article will focus on how you can manage vacant space effectively and safely as a Chartered Surveyor. Essential reading for RICS APC and AssocRICS candidates.
You can also listen to our CPD podcast on Anchor for more free AssocRICS and RICS APC training and support.
Why is this relevant?
CoStar reported that commercial property vacancies are likely to continue to rise during 2017/2018, with substantial financial impacts for owners and investors. There is also the issue of where space becomes unoccupied but remains subject to a lease.
Managing empty property will always be at the top of a landlord’s business plan with the requirement to minimise and protect net actual income and exposure, whether the property is vacant and subject to a lease or void.
For property managers and commercial property advisors, being able to minimise these costs and ensure that your client's property is kept safe and secure are invaluable skills to have.
There are also statutory health & safety requirements that you and your clients need to be aware of and comply with.
What are the key considerations?
If the property is vacant, but subject to lease
The benefits of retaining an insolvent tenant, if the property is subject to lease
Whether they want to take the property back; if the property is subject to lease
Can they pursue other parties for any default
Condition of the property
Empty rates
Minimising service charge and other outgoings
Issues with insurance and utilities
Short term temporary occupation
What happens if the property is vacant, but subject to lease?
The landlord should write to the tenant insisting that they reoccupy the property where possible and advising them of any insurer's requirements.
It will be difficult to require the tenant to reopen, as the right to do so is generally unenforceable in law, unless there is an unacceptable detriment to the landlord. For example, a keep open clause in a retail lease can generally not be pursued.
The landlord should ensure all rent is paid up to date and check the tenant’s financial position.
What are the benefits of retaining an insolvent tenant, if the property is subject to lease?
If the tenant is insolvent, the benefits will depend upon the type of insolvency being used.
If it is a liquidation, the liquidator has power to disclaim the lease ending the insolvent tenant’s liability.
In an administration, the lease can only come to an end by forfeiture or by the landlord accepting a surrender, both which require the landlords consent.
When a tenant has gone into administration unless the landlord wishes the property back, the landlord will normally wait and see what happens. The administrator may continue to run the business and will pay the rent as an administration expense.
What about taking the property back, if the property is subject to lease?
The landlord must take great care to avoid inadvertently taking back the property, for example by accepting the keys.
Whilst the property is vacant but subject to lease, the landlord should agree in writing access arrangements with the tenant, purely for health and safety reasons. This will ensure that it is not implied that the landlord has taken back possession, if they need to view the property for any reason.
When the tenant is insolvent, the landlord will need to decide whether they want the property back to relet it, or reduce their property outgoings by retaining the insolvent tenant as long as possible.
If the tenant is solvent then the landlord will need to enter into negotiation if they want the property back.
Can they pursue other parties for any default?
The landlord will need to consider whether there is a rent deposit, an authorised guarantee agreement or a direct guarantee agreement. If there is a sub-lease in place, the landlord could go direct to the sub-tenant. For leases pre-January 1996, the landlord may be able to pursue the former tenant.
Why is condition of the property important?
The landlord should check whether any dilapidations are due.
Once a property is void, a clean well-presented property will always be easier to let.
With a retail unit it might be better to 'white box' it or vinyl the shop front window to make it look occupied so that there is not a dead frontage. Alternatively, with office space a simple modern desk layout to part of the floor could assist the letting. This can only be done if it is controlled by the landlord.
You need to be aware of your statutory health & safety responsibilities - more about this in a future Hot Topic Highlight blog article.
What about empty rates?
If the tenant is in liquidation or administration, there is an empty rates exemption, which is why landlords may be content to allow leases held by insolvent tenants to subsist, until such time as they can re-let.
How can you minimise service charge and other outgoings?
When a property is void, a landlord will normally be responsible for the service charge and other outgoings related to the property.
Where a multi let property has a large number of voids, a landlord may look to reduce the overall service charge to reduce their own liability. Typically, planned maintenance may be deferred, although this can impact upon the service charge in future years when expenditure is required.
What issues might arise relating to insurance and utilities?
A landlord will be responsible for insurance and utilities when the property is vacant. It could be that the action of an administrator or liquidator has terminated the utility contracts. This change gives the landlord the opportunity to ensure that electricity and gas supplies are on the best tariffs.
Building insurance policies will be very specific on what is required, such as on security, frequency of inspections, draining down water etc.
What issues might arise with short term temporary occupation?
Landlords need to be aware that informal arrangements can result in the tenant obtaining security of tenure rights. Any short-term occupancy should be correctly documented by a solicitor to exclude security of tenure. A photographic schedule of condition should be prepared to ensure the property is handed back in no worse condition.
Relevant APC competencies:
Corporate real estate management
Health & safety
Property management
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Stay tuned for our next blog post to help build a better you
N.b. Nothing in this article constitutes legal or financial advice.