Strategies to mitigate risk and provide stability

Question 1

Lease negotiation clauses

Answer 1

Flexible break clauses
* permits landlords to terminate leases early should they require flexibility to get premises back for re-development /refurb
* Allows landlords to re-negotiate terms or adjust tenant mix
* Landlords might offer break dates as an incentive to attract high quality tenants or to fill vacant spaces quickly
* Gives landlords option to respond to market conditions if rents increase or demand increases or negotiate better terms to retain tenants if market conditions are poor
*Allows tenants to secure more favourable terms
* allows tenants to plan their finances more effectively, knowing they have an option to exit if their circumstances change or forecasts prove to be optimistic
* Premises might not meet tenants requirements - can only be determined once tenant been in occupation a while

Question 2

Flexible Leasing Structures

Answer 2

• Offer shorter lease terms with options to renew, attracting tenants who are uncertain about long term committments
• More regular rent reviews will help to align rental income with current market conditions

Question 3

Tenant Support

Answer 3

• Legal agreements to defer rent or offer temporary rent reductions can help retain tenantsfacing short-term difficulties.
• Consider providing allowances for tenants to improve their space, which can make properties more attractive and more bespoke to their needs.

Question 4

Due diligence

Answer 4

Be sure to conduct thorough credit checks and request guarantees to mitigate the risk of tenant insolvency. Obtain higher security deposits to cover potential defaults.

Question 5

Property maintenance

Answer 5

Clearly define service charges and maintenance responsibilities in leases to ensure tenants contribute to property upkeep.

Question 6

Legislation compliance

Answer 6

Keep abreast of legislative changes and ensure compliance with all new regulations affecting commercial properties.

Question 7

Property usage

Answer 7

Consider converting underutilised commercial properties into mixed-use developments that combine residential, retail, and office spaces or explore options for redeveloping or repurposing properties to meet current market demands.

Question 8

Subletting and Assignation

Answer 8

Subletting and assignation clauses (often referred to as the “alienation” clauses) set out a tenant’s rights to pass on the benefit of a lease to a third party. As circumstances change as a lease term progresses, these provisions can become very important for a tenant to allow them to sell or pass on their business with as smooth a transition as possible. It is therefore important for a tenant to consider these carefully at the start of the lease. You never know when they might need to be relied upon!

Question 9

What lease provisions affect value

Answer 9

• Repairing obligations - FRI leases require tenant to repair/insure/reinstate property
• Alienation - ability to assign or sublet provides more flexibility for tenants and security of income for tenant
• Use - less use restrictions allows more flexibility
• Term - longer equals security of income
• Breaks - provides more flexibility for tenants but can result in void periods for landlords
• Rent Reviews - more regular enables the property to be leased at market rent which can be more than the current rent paid protecting the CV of the property.
• Incentives - can attract tenants and an increase in rent for a property, such as through incentives, will lead to a higher property valuation when applying the same cap rate, compared to a property that has not boosted rents through incentives.