August 2012

Landlords fighting the big squeeze

Last month, a bitter dispute over demand for rent cuts led to 35 Regus tenants being locked out of their offices in Brentford, west London. It didn't take long for the news to spread, as disgruntled occupiers took to Twitter to lambast the workspace provider.

As the row intensifies, solicitors at Welegal have been appointed by a group of the affected tenants to pursue damages for lost business time, after the property's landlord, Helix Property Advisors, tired of Regus's demands for a rent cut and evicted the firm.

This is a relatively rare example of a landlord standing firm against demands for rent cuts. Since EG broke the news earlier this month (4 August, p19), other Regus landlords have come forward to claim they been approached by the company and urged to give in to the demands rather than lose the tenant.

Of course, Regus is not the only business looking to lower rents. Far from it - particularly in such a tough economic climate. News of retailers and hotel companies, such as Travelodge, seeking cuts are increasingly hitting the headlines. The upshot is that, with the economy still in dire straits, landlords are being left at the mercy of tenants. Occupiers are now dictating terms to property owners by threatening to walk away if demands are not met, and losing a tenant is the last thing the industry wants. But is such practice to be expected, even justified, in a tough market?

With no law against these tactics, what can landlords do when faced with this sort of practice? Here we look at how landlords are being burnt, consider how serious the impact really is and investigate if, and how, they can protect themselves from what looks set to become a growing trend.

 The Regus story

 News of the Regus rental dispute has brought this controversial issue to the fore. It is a prime example of landlords coming up against occupiers looking to slash rents.The finer details of Regus's methods of rent reduction saw Lancer Asset Management, the investment vehicle of the Abu Dhabi royal family, accepting a £1m pa cut in its rent on Berkeley Square House, W1, two years ago. Although Regus and Lancer negotiated a deal, Regus has recently undertaken other routes if its demands are not met.For example, like many other firms, the bulk of its space is leased using a special purpose vehicle (SPV), with Regus acting as the guarantor for a limited period, and in two recent cases - Regus SPV Ready Offices Brindleyplace and Regus SPV Crawley Pegler Way Centre - when its negotiations with a landlord failed to cut a deal, the SPV was placed into administration.A spokesman for Regus says: "There is an upward-only rent culture in the UK, which is at odds with the rest of the world. We are growing our business, but our new and existing relationships must be on a sustainable footing for both the landlord and us. It is all about having a sensible discussion with landlords and, in most instances, we reach agreements that suit both parties."

The wider issue

 Regus's actions may have attracted attention, but this style of negotiating is just the tip of the iceberg. A recent spate of company voluntary arrangements (CVA) has seen administrators negotiate rent reductions for a number of tenants.This month, Travelodge announced details of a CVA which includes asking landlords for rent reductions on more than 150 of the hotels it leases. Meanwhile, a Fitness First CVA was approved in June, including a rent restructure which saw rent slashed to 55% for six months on a number of gyms.Retailer Monsoon has also requested monthly, rather than quarterly, rent and a letter sent by the Property Managers Association in the second quarter called for landlords to give greater concessions for its retail members. It was written on behalf of tenants including Poundland and Next.Jason Webb, director at Jones Lang LaSalle in Southampton, says: "Every lease event is treated as a potential relocation opportunity by occupiers, especially as most space is now over-rented and the incentives being offered cover relocation costs."As a result, tenants know they can try to cut a competitive deal when a lease expiry date is looming, fully aware their current landlord will not want to lose them.Liz Peace, chief executive of the British Property Federation, says: "Once again landlords are being asked to play a significant part in rescuing a business, and a minority at that, who are being asked to take a big hit, to keep a far bigger business afloat."


In tough times, though, is this sort of practice to be expected from occupiers? Commercial tenants have to keep an eye on their balance sheets, and sometimes part of the professional advice they are given tells them to seek new letting agreements.Following a strategic review conducted by CBRE and Javelin Group, fashion chain New Look concluded it may have to have to shut 100 shops from its 600-strong portfolio over the next three years if it is unable to wrestle better deals from landlords.For years property owners have had the upper hand in transactions, so it is no surprise now that occupiers are trying to capitalise on a fragile market. Real estate lawyer Danielle Drummond-Brassington from CMS Cameron McKenna says: "This is all down to market forces. When times are tough you have to carefully consider every proposal and make sure it makes sense in terms of the bottom line, whether you are the landlord or the occupier."Another construction lawyer adds: "This is all part of strategies firms have thought carefully about, and now that is paying off. And they are perfectly within their rights legally to do it."

 A growing trend? 

Whether or not these increasingly tough tactics are justified, the fact remains that they are putting landlords under pressure. And there appears to be no sign of any let up, as this practice is unlikely to be a one-off, says Drummond-Brassington. She predicts that the property industry can expect more SPVs filing for administration, and more bargaining behind the scenes."We are seeing a quite a bit of this," she says. "It is not illegal, but shrewd practice. Occupiers are testing their landlord's will, with landlords fully aware that, outside London, there is not going to be a queue for buildings."When it comes to what landlords can do to protect themselves from this practice, a great deal is down to common sense and caution.For one, the spate of recent incidents should make property owners more diligent about having a strong guarantee in place: "To litigate and avoid such problems, you have to look at any concerns or assess the viability of a guarantor at the beginning of the transaction," says Drummond-Brassington.Simon Baynham, property director at Howard de Walden Estates, adds: "Tenants are becoming more cautious when offering their covenant. SPVs are being formed to take the lease, and we are being offered capped guarantees by the parent company."Part of the problem is that too many landlords offer long rent-free periods and, when these expire, the rent is immediately over-rented. More sensible inducements would allow lower rents, and the tenants would then be at less risk of defaulting on an over-rented property."And perhaps there will be some reprieve for those affected by CVAs, with the BPF calling for a review of the practice. The trade body argues that the rules surrounding CVAs need reviewing, and "some greater sense of fairness" should be restored.

How bad is it? 

There is a regional disparity in the severity of the situation for landlords. Rhys Evans, equity partner agent at West End agency Monmouth Dean, says there is less pressure on landlords in the capital, although he adds that they are still being much more careful in the office market when it comes to renewing leases. He says they are not pushing rents up too high as they want to retain tenants and do not want to incur voids.Simon Knights, head of West End agency at Strutt & Parker, says: "I am aware of a number of tenants in the West End that have asked to change to monthly rent. 99% of the time landlords will say no, but sometimes they will agree if they can negotiate more parts to the deal, such as a slight rental rise."He believes it is more difficult in the regions for landlords to play tougher as firms are taking more risky measures to secure occupants. In Southampton, investment company Skandia has sublet space rent-free in Mountbatten House for three years to Lloyds Register rather than sit on full rent rates and service charges.But while landlords may be more outspoken and in a better position to fight back in London, rent-cutting tactics are hitting regional firms hard and becoming increasingly prevalent. At what point the boom-time country-wide attitude of telling a tenant to take a hike will return is unknown. But, until then, the small print on any new deals should not be taken lightly by either party.


What landlords can do to protect themselves

Danielle Drummond-Brassington, a real estate lawyer and partner at CMS Cameron McKenna's London office, offers the following tips on how landlords could better protect themselves from tenant disputes:

● Make a detailed analysis of the strength of a tenant's covenant.

● Try to limit the rent concession period.

● If a tenant is demanding a rent cut, strive to negotiate a deal that will offer something in return.

● Attempt to get some form of extra security, such as a higher deposit.

● Use PR and journalists to tell your story if you believe it is unjust. This could prompt tenants to be more agreeable.

By Joanna Bourke of EG 25-08-2012