Covid-19: Part 1 - Reliefs and Rent Frees

On Monday 23rd March 2020, Boris Johnson placed the UK on a 3-week lockdown. As a result, working in the office is simply not an option for most of us, unless you are a “key worker”.

The impact of Covid-19 is therefore going to be felt by virtually every UK business, irrespective of the sector it operates within.

Some businesses have already been brought to a standstill particularly those in the non-food retail, travel, events and hospitality sectors. Others especially in the social media and I-T sectors have fared better. But sooner or later, we will all feel some pain, that much seems certain.

Contrary to some reports though, there is no legal requirement forcing landlords to offer concessions to tenants and it is far from clear whether business rates relief will apply to office premises.

As ever, the key to getting through this crisis will be cash management. As we know, the UK Government is introducing a range of support measures including generous business rates relief for the retail, leisure and hospitality sectors. But what about businesses like yours that rent office space. Is there any Government assistance for you and is there anything you can do to conserve your cash over the next 12 months without jeopardising the relationship you have with your landlord?

Here are some initial thoughts.

Business Rates Reliefs – current status

Following his Budget on 11 March, the Chancellor recently announced that Retail Relief would extend to all occupied retail, leisure and hospitality properties in the year 2020/21. There will be no rateable value limit on this relief. The relief is available providing the business premises are occupied wholly or mainly for specific uses including shops, restaurants, cafes, nightclubs, theatres, gyms and hotels.

Initially, it was announced that those sectors not eligible for relief would include financial services, estate agents, medical and professional services. Yesterday Rishi Sunak confirmed that he was extending the relief to certain professional services, estate and letting agencies and bookmakers. All will benefit from a one-year business rates holiday. In most cases, this will represent the equivalent of a rent, service charge and business rates holiday for between two to three months.

Business Rates Reliefs – the immediate future

According to our rating consultant Paul Giness, if your business is not officially eligible for relief right now all is not necessarily lost.

For example, it is possible that there may still be strategies to consider if your property was already vacant prior to the Coronavirus outbreak, and not covered by the Retail Relief.

There might also be scope to appeal properties that do not benefit from the exemption, as the effects of Coronavirus may constitute grounds for appealing the rateable value. Furthermore, if locations are mothballed or become partially vacant, there could be scope for empty rates relief of up to six months, depending on the property type.

If you are in any doubt in relation to your particular use or circumstances, you should seek advice from your local authority and/or one of our Rating consultants.

Rent Free Concessions - current status

On Monday 23rd March, the UK Government said it would protect commercial tenants from eviction or forfeiture if they defaulted on their rent, due to Coronavirus. The protection will cover the next 3 months, at least.

This move has prompted some landlords of retail and leisure property to voluntarily offer their tenants a 3 months rent-free period.

Contrary to some reports, that there is no legal requirement for landlords to offer concessions to their tenants. The legislation is not in other words going to force landlords to write off the rent and other sums that are due to them. Instead, these sums will remain a liability for their tenants. Landlords are simply being prevented from forfeiting leases during the ‘Period’ if their tenants are unable to pay what is due.

In response, some tenants have decided to withhold their March quarter rent payments to aid their own cashflow. Primark are a leading example of this. They were due to pay £33 million worth of rent on their estate of 110 leasehold properties yesterday. Also, it was reported just this morning that the landlord of Manchester’s Trafford Centre received just 29% of its March quarter’s rent.

The measures to protect commercial tenants are set out in the Coronavirus Bill which was rushed through Parliament in the last few days and became law late last night (Wednesday 25 March). The emergency legislation covers a plethora of issues including wide-ranging powers for government ministers, councils, police, health professionals and coroners.

The key provision as far as commercial tenants are concerned is the suspension of landlords’ forfeiture rights until at least 30 June 2020 (the ‘Period’) which of course for many, will capture the 24 June rent quarter day. The ‘Period’ can be extended on one or more occasions, if needed.

Note that the legislation implies that the term ‘rent’ will include all expenses due under a lease. In other words, it should cover service charges and building insurance.

Conclusions – for now ! (Thursday 26th March)

As far as business rates relief is concerned, if you are not eligible for relief right now, our advice is to sit tight and await further announcements. If you are eligible, visit your local authority’s website and start the process to register for the relief.

In terms of rent and service charge payments, you have the option not to pay rent demands up until 30 June 2020. But please bear in mind that the money due to the landlord will not be written off and at some stage you will need to agree a re-payment plan with the landlord.

The re-payment plan is likely to form part of a lease renewal, break option surrender or rent review negotiation, depending on where you are in the term of your lease and what provisions already exist for uplifts and so on.

Before engaging with your landlord, please read my note tomorrow which will set out the options and potential strategies for such a negotiation.

Until then, stay safe.

If you have any questions or need advice in relation to a specific lease or building, let us know by contacting Martyn Markland by email at mm@tenantag.co.uk.

Don’t be taken in by ‘Take-Up’

Whilst office ‘Take-Up’ in Manchester was over 1 million sq.ft. in 2019, just 100,000 sq.ft. of extra office space was physically occupied that year. So, what is really going on in terms of office Supply and Demand?

A headline from Business Insider back in April 2019

Unfortunately, ‘Take Up’ figures tell you relatively little about the state of Supply and Demand. It reminds me of the situation back in the summer of 2008, when a financial prospectus described the Royal Bank of Scotland as a successful global bank with a turnover of £30 Billion a year. What the document failed to mention of course, was that the Bank was technically insolvent having suffered a loss of £41 Billion. If you bought shares in the bank at that point, you have my fullest sympathy!  

Commercial property consultants love to talk about ‘Take Up’. You might hear them say that 2019 was another record year in Manchester with ‘Take Up’ hitting over 1 million sq.ft. for the sixth consecutive year. Sounds good doesn’t it particularly, if you are a leasing agent on a glitzy new office tower in Spinningfields.

Don’t get me wrong, I am not saying that Manchester’s office market is about to collapse. All I am saying is that when assessing the health of a property market, try and avoid being taken in by the ‘Take Up’ figures. They might sound impressive, but they will not tell you whether the market is booming or in free fall.

Source: Co-Star Database, 20 January 2020.

One of the most useful statistics we use when measuring the performance of an office market is something called ‘Net Absorption’. This tells us from one year to the next, just how much extra office space is being physically occupied compared to the period before taking into account all space vacated, demolished, converted or newly constructed.

For example, the graph above plots annual Net Absorption in Manchester’s Core Office Market in the 10 years from January 2010. It shows that Net Absorption has averaged approximately 100,000 sq.ft. per annum. Given that jobs growth has run at about 1%-2% per annum over this period and that there are around 100,000 private sector employees working in the city, these numbers are no surprise.

The point is that if your job is to promote the funding, leasing or selling of office buildings, Net Absorption figures of 100,000 sq.ft. per annum don’t sound quite as exciting as ‘Take Up’ figures of 1 million sq.ft. for six consecutive years.

The problem comes when tenants start to panic because they have read newspaper headlines that state that office ‘Take Up’ is hitting record new levels. These headlines might naturally lead some to conclude that they should be agreeing to pay higher rents when in fact, the reverse might be true! Think back to the RBS scenario. The headline figures therefore have the potential to mislead. This can create distortions in the market which isn’t great, as least not for the business tenant or the unsuspecting property investor or lending institution. We’re back to RBS again!

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If you would like advice on the office market and how your business can navigate it successfully, please call Martyn Markland on 0161 457 1422 or email him at mm@tenantag.co.uk.

What a Relief!

Grade II Listed Colwyn Chambers on York Street in Manchester. Vacant offices in this building are exempt from empty business rates because the property is Listed.

Has your business vacated a Listed building recently? If so, you might be able to reclaim some of your business rates and the sums involved could be significant.

We have just successfully recovered over £100,000 for a client which vacated a Listed building in Glasgow 4 years ago. The client was unaware of the exemption and had therefore been continuing to pay the local authority the business rates it demanded of around £25,000 a year, for no good reason! The question is, how many more businesses have been wasting similar or even greater sums of money?

Ordinarily, you do not have to pay business rates on empty buildings for 3 months once they fall vacant. However, after this time, most businesses become liable to pay full business rates. But there are some exceptions. The one that often gets overlooked is Listed buildings.

If you currently rent or have in the past rented space in a Listed office building which you subsequently vacated, you should have been exempt from paying business rates. Even if you have since disposed of your lease, it may be possible to secure a retrospective rebate. As we found in our most recent case, the corporate client had been unaware of the exemption until we were appointed as their property adviser.

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If you would like advice on your business rates liabilities or indeed, any other aspect of your commercial property holdings, please call Martyn Markland on 0161 457 1422 or email him at mm@tenantag.co.uk.

Office demand is shrinking, or is it?

As businesses become more agile, they tend to demand less space per employee. Should landlords be worried?

Ask Development’s No.8 at First Street in Manchester

With 150 employees housed in its 15,000 sq.ft. regional office in the heart of Manchester’s traditional CBD, Willis Towers Watson conform perfectly to the property industry’s benchmark allocation of 1 person per 100 square feet. However, as we have witnessed with other occupiers in recent years, Willis are learning how to use their space more efficiently. Consequently, its next office will be significantly smaller than its existing one despite it having to house at least the same number of staff.    

Willis Towers Watson recently agreed to lease 11,590 sq.ft. at Ask Development’s No.8 at First Street in Manchester which it will move in to later in 2020. Its’ new office is 25% smaller than its current 15,457 sq.ft. suite on the fourth floor of Belvedere House. Surely, this spells bad news for landlords?

The newly developed Landmark office building on Peter Street in Manchester.

It is a similar story for global property consultants JLL which will shortly be moving its Manchester office to the 10th floor of the new Landmark office building. Its new suite measures 13,896 sq.ft. which is 15% smaller than its existing space at Piccadilly Gardens (16,365 sq.ft.).

So, what are the implications for office developers if tenants are demanding physically less space? Does it mean there will be swathes of new office space left empty and fewer new buildings being built? Will rents fall as a result of there being less demand?

Well, the answer is far from straightforward. Sure, in general terms, less space is being demanded per individual office worker. However, the way that office space is being used is changing and fast.

Agile working is causing developers to re-think office design. For example, they are now having to provide collaboration space within the common areas. Coffee shops and meeting pods are becoming a standard feature of office receptions. At the same time, average lease lengths are becoming shorter. Tenants are therefore less willing to invest in their own kitchens and meeting rooms. These facilities are increasingly being provided by the developer within the common areas.    

It is true that tenants in multi-let buildings are occupying less net useable space per employee than they did previously. However, because developers are having to provide more overall gross floor area in order to accommodate all the extra facilities which now also include things like bike hubs and Amazon parcel lockers, rents are tending to rise faster than inflation on a rate per square foot basis.

Because tenants are occupying less physical space, they are tending to accept that rents quoted on a net basis should be higher to reflect the additional facilities being provided within the common areas. Afterall, what matters to most tenants is that the working environment matches the aspirations of their most important business asset. In other words, their staff.

The net result. You pays your money and you takes your choice.

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If you would like advice on an office relocation either in Manchester or elsewhere in the UK, please call Martyn Markland on 0161 457 1422 or email him at mm@tenantag.co.uk.