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.