Is owning a business property a liability?

Sarah McLoughlin, Senior Associate, B P Collins LLP, takes us on a journey that outlines some of the roadblocks and potholes waiting for the unsuspecting.

Owning a business property is a doddle, right? After all, it’s only bricks and mortar and that can only be an asset surely? Yet, in the wrong hands, acquiring and owning a business property can be at best, a headache and at worst, an expensive nightmare.

Most people think of buying a business property in the same way as buying a private home – we are preconditioned through our own experiences to correlate the two. But nothing could be further from the truth. Choosing where the office is going to be and negotiating the price might seem right at the time, but with the future in mind, you need to tread carefully. Businesses change quickly – especially in economic recovery phases – and being saddled with the wrong property at the wrong time, can often constrain business agility. Getting the key decisions right during the buying phase can make all the difference to flexibility in the medium to long term.

Business growth aside, there are often many parties involved in the business owners that can further muddy the waters. And standard agreements affecting landlords and tenants are usually tailored from a template agreement to save time, but this could well be the wrong starting point as the agreement is manipulated to fit today’s requirements, rather than starting from the position of documenting what has been agreed.

Overcoming the desire to seal the deal quickly – may be driven by a long drawn-out property search – could mean the difference between a good investment and costly litigation in the long term.

This is where going to the experts and taking the approach of managing the long-term risk by starting at the right point, will pay dividends in the future.

Despite the sense in seeking specialist advice, organisations can often be too quick to accept the myth that acquiring commercial property is a simple process. Many limit their legal reflection to a simple scrutiny of the tenancy agreement – and fail to assess the exposure to risk inherent in some of the more, to the untrained eye, straight-forward areas of the agreement. It’s no surprise that the incidence of commercial property litigation remains high.

So what are the pitfalls?

One of the most common mistakes is the tendency for organisations to wait until they’ve all but agreed a deal with a landlord before seeking professional advice. Starting the discussion in the wrong place can be damaging; negotiations may have focused solely on price and critical aspects may have been overlooked. At a basic level, organisations can end up paying too much rent. More damagingly, their inexperience can lead to them paying the far higher price of failure further down the line.

Optimal negotiations will go well beyond the rent – there are numerous additional considerations. How much rent-free period can you negotiate to allow you to move in and fit the premises to your specific requirements? Is there a service charge, and if so, is there potential for capping or limiting it?

Dilapidations are another consideration. A property could, for example, be a listed building with a lead roof that becomes beyond reasonable repair and needs replacing. A landlord will undoubtedly want to pass those repair costs onto a tenant. Although there will be a number of get-outs, the cost of finding them – reactively – will not be insignificant. Proactive advice, on the other hand, is priceless. Recriminations around ‘failure to repair’ at the end of a term, though common, are best avoided. Negotiating a cap on dilapidations is the most sensible approach.

Sometimes disputes can appear to be outside of a tenant’s control – not least in multi-tenanted premises. For example, taking an assignment on premises that already have tenants in occupation of other parts of the building is not uncommon. However, in some cases, organisations can find themselves indirectly exposed if their agreement stipulates vacant possession of the whole building at the end of the term. In such cases, even parking spaces can present a challenge; in instances where someone has innocently forgotten an imminent lease expiry and parked overnight, a tenant can face legitimate arguments about whether vacant possession has actually been delivered up.

The importance of building flexibility into lease assignments cannot be overstated. Organisations should avoid agreements that commit them for lengthy periods of time and, where appropriate, negotiate short-term leases or break clauses. Likewise, businesses should beware of contracts that are too difficult to exit; disposing of a property is as important as acquiring one – and it’s vital to establish sensible exit terms up front.

The proactive approach provides much-needed certainty and helps financial planning. The most effective organisations are those that have a good understanding of the long-term costs of tenancy, and how they are likely to increase during the course of their occupation.

The casual notion that commercial property is one of the most straightforward aspects of business ownership is a myth. The smartest organisations are not those that try to be clever by doing it alone, but those that acknowledge its many pitfalls and partner with a trusted adviser to ensure they avoid them. Then it can become a real asset.

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