Posted on Apr 01, 2020
It has been a question that has been relevant for several months recently, but with current events becomes somewhat more urgent.
Over the last 3 or so years, many rents have increased by up to 50%.
That impacts in a positive way on a landlord, and more so if the landlord has owned the premises for some time.
And if the landlord is considering selling it is positive, as, combined with lowering yields it pushes the value of the building up.
But where it impacts in a negative way is on the tenant, and in particular, small businesses. We know that there are many small businesses, who collectively employ a significant proportion of our workforce, that are not massively profitable. They may employ numbers of staff, and provide the owner/manager a decent living. But often they are reliant on bank funding to continue operating, and that bank funding is generally secured by the owner/manager’s house.
In many of the industries that these small/medium businesses operate, pricing is market constrained. When costs increase, whether they are wages, rent or other operating costs, the squeeze impacts.
Where rent is a large proportion of their costs, an increase of 50% has major impact. The reason for the major increases in rent are various – but eventually all come back to the market. There are instances where tenants have negotiated fixed rental increases for multiple years, or solely CPI increases. And sometimes tenants have been able to negotiate “sweetheart” rental deals. But eventually these all come to an end, and the rent moves to market. And that is when the shock impacts. Most tenants will be focussed on running their business, and not necessarily aware of real estate markets. They might know that building values have risen, and vacancy rates are low, but not joined the dots to understand the impact that has on their rental. Often the perceived solution is to look around the market for a cheaper building. And then the reality hits. Unless the tenant is prepared to downsize, wherever they move to they will be paying market rates.
What is the answer? Obviously there is no one simple and easy answer. And there is an argument that says that extending the “sweetheart “ deal, in whatever form that may take, just prolongs the illusion that a business is viable.
No landlord wants to lose a tenant - one that pays their rent that is!
The current crisis may prove a godsend to many businesses already struggling with affordability of rent. In time landlords may be forced to reduce rentals in order to attract tenants. But to get to that point, businesses will need to stay solvent until they can take advantage of softer rentals.
The current lockdown is possibly a turning point for many landlord/tenant relationships. Irrespective of the lease which contracts the tenant, if their turnover has dropped to zero because of the lockdown, or plunged dramatically due to the inevitable recession, then many landlords may be forced to re-negotiate rentals. If they want to retain their tenant that is.
And negotiation is surely a less costly alternative than litigation – whatever the lease may say.