Thinking about opening a shop in Bath? Part 2 – “Location”

Following my previous post on this topic, you would be forgiven for thinking that it is not economically viable to open a retail shop in a central location in Bath. This is just not the case. Provided you can find the right property it can be extremely lucrative to trade in Bath - one of the UK’s most popular cities.

In Bath the prime retail locations are generally located on a “spine” of the city that extends from Milsom Street down to Southgate.  In general terms the rents for shops located on this spine are higher than those elsewhere reflecting the high level of footfall. Prime rents are currently £200ITZA and are predicted to rise during 2015 due to lack of available vacant retail space.

If you take a walk from the top of Milsom Street to the train station you will see that trading on the spine is mainly (but not exclusively) the preserve of the national or regional retailer. On this spine there are also hot and cold spots where the footfall and the rental rates vary from the headline prime. The location of the spots changes over time depending on a variety of factors.

Elsewhere in the city centre it becomes more complicated.  Just because for example, a property is located a handful of meters away from the central spine it does not automatically mean that it is in a good location for your business. Don’t be fooled by the high asking rents on certain properties and assume this translates to an excellent location.

Other locations do exist in the centre of Bath that offer excellent opportunities for the well informed retailer to trade from at a fraction of the costs paid by some occupiers trading from prime locations.

Enlisting the services of a local chartered surveyor can not only help with understanding the dynamics in the city of Bath, and with understanding the types of retail offer that work in specific locations but can also give you access to valuable “off-market” opportunities.

As part of this firms search and lease negotiation service we actively explore these “off-market” opportunities which are accessed via both our extensive contact list and our proprietary search procedures. The Bath retail market has seen a lot of demand from retailers in 2014 with no indication of this demand abating in 2015.

With local expert help you can find and make an informed decision when deciding on the right location for your business. Provided your business plan is solid, the retail offer attractive and you don’t make costly mistakes when negotiating a lease you can make a lot of money from opening a shop in Bath

Thinking about opening a shop in Bath- Part 1

You could take an “assignment” of a shop lease located in a prime location currently being offered by a London based firm.

Here are the eye-watering annual property occupancy costs taken from the marketing particulars for this shop.

Rent: £225,000 plus VAT per annum.
Business rates payable: £64,900 per annum.
 Service Charge: £14,600.00 plus VAT per annum

Total occupancy costs of this shop will therefore be at least £304,500 exclusive per annum excluding utility and staff costs.

It is not a big shop it has c1,200 sq.ft. on the ground floor and about the same on the 1st floor.

You will also have to pay the landlords annual cost of insuring the property in addition to paying for your own contents insurance. Also please be aware that there is a rent review in 2015 so the rent could in theory go up next year!

By the way the service charge is a budget figure so if the landlord elects to spend more than the annual service charge budget you will have to pick up your share of a balancing charge at the end of the service charge year (unless the existing tenant negotiated a service charge cap in this lease).

If you do take an assignment of this lease you will “inherit” any disrepair that exists and you will of course have to pay to fit the store out to your own specification.

Don’t forget you will have to pay your own professional and legal fees associated with the transaction and likely have to pay both the landlord’s professional and legal fees associated with the grant of a licence for alterations which will be needed to document the landlords agreement to your store fit out works.

Ok so if your business plan can live with these costs there are a few more things that you need to be aware of. The lease expires in 2020 and you can’t leave early if you are losing (or fatally hemorrhaging) money. While you can of course just physically close and vacate the shop (and save on staff and utility costs) you will still have to pay the occupancy costs to the landlord whether you trade or not up to the lease expiry (at least £304,500 net per annum).

If you close and vacate the shop, and the landlord has a “keep open clause” in the lease you could face a legal claim from the landlord. I wonder if this is why the existing tenant has not just closed their doors?

When you leave the store at lease expiry you will likely be required to strip out all your fit out and put the premises back into full repair ready for the next traders fit out.

The good news is that the existing tenant might pay you some money to take on this lease. If they don’t you can always try the trader three doors away as they have their store on the market as well at a similar cost per square foot. The only problem is that you or your business will have to pass some pretty stern financial tests, so unless you can prove you have been making a net profit of at least £500,000 in each of the last three years it is likely your “covenant strength” won’t meet the profitability requirements needed to take on either of these prime location leases.

I think it is safe to assume that the current occupier is not expecting an incoming tenant to pay them a premium for this lease. That said anything is possible bearing in mind this occupier took on this lease in the first place!

www.mcneilcommercial.co.uk

Why commercial property tenants should have a schedule of condition

Schedule of Condition - Commercial Property

When negotiating terms for a new lease of commercial premises for our clients we aim for the lease to refer and incorporate a photographic schedule of condition.

A schedule of condition is a series of photographs accompanied by narrative used to document the condition of premises shortly before the start of a lease.

This record is a snapshot in time detailing the condition of the premises and highlighting any items of disrepair or required redecoration.

 A schedule of condition is important for a tenant because a lease generally requires an occupier to yield up and re-instate the premises at the end of the term. The lease may state that the premises are to be returned to the landlord either:

1) In full repair.

2) In the condition that they were in when the occupier took on the premises.

In the former case a requirement to return the premises in full repair can be an onerous and expensive obligation for an occupier where the premises is anything other than newly constructed or refurbished.  Tenants taking a new lease of an office agreeing to return the premises in full repair can find themselves unwittingly having to rectify and pay for the cost of the landlords (or a previous occupiers) repairs or redecoration. They can essentially inherit historic disrepair from the landlord or the previous occupier and end up having to put the premises back into a better condition than what it was when they signed the lease.

The latter case can help to ensure that a tenant doesn’t inherit disrepair from a previous occupier or from the landlord.  However, without a photographic schedule of condition agreed and signed by both parties at the start of the lease there is likely to be a dispute as to what the condition of the premise were at that time.

A schedule of condition should be prepared as close to the lease start date as possible and preferably by a chartered surveyor. One can be prepared in a few days and while the cost of preparation varies with the size of the premises it can often pay for itself several times over at the end of a lease.

Written by Jamie McNeil a director of commercial property occupier advisors McNeil Commercial. McNeil Commercial is a Bath based firm providing valuable advice to a wide range of clients across the UK.

Commercial Property- Service charge apportionment

10 things a business occupier can do to check whether their service charge percentage is correct.

There are different methods that landlords use to split service costs between the various occupiers whether in a building, shopping centre or on an estate but the most common by far is the floor area basis.

This is where the percentage payable (by a unit or occupier) is calculated by dividing the floor area of a particular unit by the sum of the floor areas of all the lettable units to arrive at a percentage payable.

Your lease will specify how the service costs are to be split by the landlord so check it to ensure that the landlord is allocating costs to your premises correctly.

Check:

1) The landlord is using the sum of all of the lettable parts (not just the sum of the units that are actually let). Check that they don’t miss any vacant units or lettable parts and if they do question it. Check the arithmetic.

2) Income-generating activities are contributing a fair share towards the service costs that they benefit from. If not why not?

3) The floor area figures used by the landlord against your own measurements and those of other occupiers for accuracy. The landlord should be able to substantiate his figures by providing a copy of a measured floor area survey (ideally completed by an independent third party specifically for service charge purposes).

4) That the landlord has not mixed methods of measurement for example that they are not mixing NIA and GIA floor areas.

5) That the floor areas are up to date to take into consideration recent tenant alterations such as expansion of a particular unit.

6) Whether your lease specifies a fixed or capped percentage and whether the percentage can be varied.

7) Whether there is more than one percentage in your lease.

8) Whether the Landlord should use different schedules. Is it appropriate for there to be several schedules and if so which service costs should be included within each schedule and which units should be picking up a share of each schedule?


9) How has the landlord arrived at splits between schedules and are they fair reasonable and are calculated in accordance with the lease. (Where the landlord is using different schedules it is common for the landlord, rather than the provider/ supplier, to manually split certain costs between these schedules).

10) Check if the landlord has used weighting and if weighting is appropriate. What weighting bands have been used and are they correct? Finally is weighting being applied correctly?

The above are some of the basics with regard to service charge apportionments and the list is by no means exhaustive.

Further recommended reading:  The RICS code of practice: Service Charges in Commercial Property. 2^nd Edition available from the RICS www.rics.org

Written by:  Jamie McNeil Bsc Econ (Hons) Dip. Surv. MRICS

Director at McNeil Commercial Limited www.mcneilcommercial.co.uk.

Date: 22^nd May 2013

COMMERCIAL PROPERTY SERVICE CHARGE DISPUTE RESOLUTION

McNeil Commercial has built up a bit of a reputation for resolving commercial property service charge disputes.

How have we done this?

Well a lot of our work comes via solicitors or accountants and they contact us because they need someone who is a niche specialist to analyse in detail their clients concerns over service charge sums demanded.

We get a hold of the lease, details of the issues in question and visit the property. In our opinion a service charge analysis cannot be done without listening carefully to the client and visiting the property to complete an inspection.

We look at what has been charged and make up our own mind on the correct charging scheme at a property. In preparing this report we look at not only the service charge clauses in the lease but also all of the other terms so that a proper strategy can be formulated and the big picture is not overlooked. We use our proprietary service charge checklist, which has more than 150 points, to be checked.

Only after all of the above do we produce a concise easy to read report for our client on our findings, conclusions and recommendations. There are times when our clients are being undercharged or where the charges absolutely spot on. In these cases we would recommend monitoring expenditure going forward and explain the reasons why.

We report our recommendations to our client and follow through for as long as it takes.

Business tenants – Handling a commercial property service charge dispute

The most frequent question I am asked by new clients when I first take on a service charge instruction is “should I pay this invoice or withhold payment of it?”
Business tenants are often faced with this dilemma for the first time when the service charge on their commercial property suddenly rises.

To pay or not to pay that is the question.

Withholding payment of service charge is not to be taken lightly. Where service charge is “reserved as rent” then non-payment could result in the landlord taking one of the following nasty measures

• Instructing bailiffs

• Forfeiture of the lease

• Issuing proceedings

• Statutory demand

Each one of the above will likely result in costs being recovered via the lease from the Tenant and can result in the loss of the business premises or the business itself.

So what is my advice to a new client faced with an increased service charge?Well as always it depends on the specifics of the situation facing the tenant.
A tenants strategy for dealing with a large invoice and whether “to pay or not to pay” has to take into consideration not only what the landlord can do but also what the landlord is likely to do given the circumstances.
The course of action a landlord or their agent chooses to pursue will depend on a number of things not limited to the following:

1) Terms of the lease.

2) Age of debt.

3) Size of debt.

4) Landlord relationship with the tenant.

5) Strength of the tenant.

6) Landlord objectives or strategy for the particular premises.

7) Who the landlord is.

8) Landlord obligations to other parties.

9) The situation on the estate or in the area.

10) The specific circumstances surrounding the debt and their confidence in the validity of the charges.

Only after the above is analysed can a comprehensive and well thought out strategy be built and implemented for dealing with the issue.

Simply not paying without taking steps to protect yourself is never a good idea.

Author: Jamie McNeil - Bath based chartered surveyor and director of McNeil Commercial Limited
Date: 21st January 2012

Service charges in commercial property 2012

Don't turn a blind eye in 2012 to service charges on commercial property.

Have you ever wondered whether your business is paying too much service charge on your commercial property? If you are reading this article then perhaps you have thought about it but did not know what to do.

If you are a business owner or a finance director it is likely to be your responsibility to sign off the service charge payment to the landlord every three months. The buck also stops with you when the landlord issues a request for payment of a balancing service charge.  If you have any concerns about signing off a service charge invoice then shouldn’t you do something about it?

On the 1^st October 2011 The Royal Institution of Chartered Surveyors (RICS) issued the second edition of a code of practice for Service charges in commercial property.

You can download a copy and have a read I have posted a link at the bottom of this article.  It has the status of a guidance note so does not override the terms of your lease.  Another thing to do is to look closely at the terms of your lease to check the landlord is invoicing you in accordance with those terms.

This is where things become tricky. Unless you have a lot of experience in dealing with commercial property leases i.e.are a chartered surveyor or a lawyer specialising in commercial property then it is unlikely that you will be able to:

• Interpret all of the applicable lease terms fully and accurately.
• Establish how much of a case you have to legitimately challenge your landlord over individual costs contained within the service charge.
• Form a strategy for challenging the landlord and execute it successfully.

I am not saying that it is impossible for you to do this. It is just difficult and time consuming. Imagine for example a surveyor trying to do your job. He could muddle through part of it but he would certainly make mistakes some of which could be costly. Your time is quite frankly better spent on doing what you do best and not embarking on a new time consuming project in an area outside of your core expertise.

If you want more information then read my article below: Service charges - Top Ten Tips for Tenants.

Alternatively you can just turn a blind eye and continue to pay the landlord whatever service charge he invoices.

Useful resources:

http://www.mcneilcommercial.co.uk/property-service-charge--top-10-tips-for-tenants

http://www.servicechargecode.co.uk