Any Commercial Property Experts out there?

[PhilTheFragger]

5 years ago my wifes firm (a Partnership) took out a 15 year lease on a 6000 ft2 office in West London
with a rent review after 5 years (Now) and a further rent review with break clause after 10.

Rents have massively increased over the past 5 years from £21 per sq ft to £58 per Sq ft now and they cannot afford the increased rent .
They have asked the Landlord to release them from the lease, and he will if they pay 600k dilapidations, which they also cannot afford.

They dont need an office that size and have asked if they could move to another smaller (3000 ft2)office that the landlord owns, he has offered them a place in a currently derelict building 3 miles away in Park Royal, but has not provided any figures on rent for that property or a timescale as to when it would be inhabitable, or what rent they should be paying in the meantime.

anyone got any experience of what to do in this situation?

We see one options as

1, offer a sum of money (about a quarter of what he wants, which is the maximum they could raise) and walk away. ---- The problem with this is if he rejects this , he could pursue the individual partners through the courts for their personal assets. How likely is this?

We think the landlord is being unreasonable, nobody could have foreseen such a massive increase in rents, so there must be loads of other small businesses in a similar position

 

[SteveJay]

Phil,

I have dealt with commercial real estate (lending) for most of my banking career, although obviously not experienced this first hand.

Clearly the landlord has the law behind him, the break clause is not for 5 years so any surrender would be at his discretion and subject to a premium. I am not sure if he is being unreasonable. He seems to be merely exercising his contractual rights. Rents have risen but he hasn't benefitted to date hence the review clause. If he agreed a sub market rent now he would possibly be devaluing his property should he want to sell within 5 years.

However, he sounds like a professional outfit with multiple properties, so may be open to negotiation if the partnership looks professional too and seeks independent advice on rents etc.

Whether he would pursue non payment as you suggest depends on whether he thought it would be worthwhile. It would involve costs and hassle, but if he thought that was easier than re-letting and risking a void period he might do so.

My advice would be to get professional advice. Is the rent review fair or could it be challenged? Similarly get advice on the dilaps payment to make sure he isn't seeking any payment to enhance the property beyond the usual requirements. If he knows you are serious and getting advice he may well reach a compromise. A tenant, even one that moves to a smaller unit for less rent is still a valuable asset and whilst the market is buoyant there are still enough uncertainties around to make his strategy quite risky, unless he knows he can re-let it easily.

Clearly you need some more details about the alternative unit in terms of rent and timings. Again advice would be key to ensure its a fair deal.

Good luck, its not an easy situation but if the partnership have been a good tenant, prompt payers etc then I would think he would want to try to retain you, especially if it solves his letting requirements for the new office once refurbished.

 

[PhilTheFragger]

Thanks Steve

Another option is to sublet, and then do a runner in 5 years at the break clause

 

[Hobbit]

Not really an expert - you need a property solicitor for that. I'm currently negotiating with the landlord for our office in Aberdeen. We are about to hit the break clause and are considering moving to somewhere bigger. In terms of dilapidations, all we have to do is bring in a building firm to return the property to its original state.

If he tries to charge £600k for dilapidations he'll need proof of the work he needs doing. Equally, the tenant can get their own quotes providing it isn't in the lease that he arranges it then back charges.

However, he is entitled to charge the rent between now and breakout.

As SJ says above, a decent landlord may well buy into the idea of keeping a good tenant in the smaller property. Ours is certainly being very accommodating, but maybe that's because we're looking at something bigger.

Legal advice and a meeting required. I'm using a property specialist, and it's proving to be well worth the expense.

 

[SteveJay]

Yes, if that would work for the firm. Could they partially sub let, or would that create security/access issues? Just thought sub letting the extra space no longer needed might be an option rather than relocating and subletting the whole site.
Remember that if they did that and the sub tenant defaulted or vacated, your wife's firm remains liable for the full rent.
Hope they sort something that works out though. All the best.

 

[AMcC]

My mate is a chartered surveyor and his speciality is rent reviews. I will send him your text and see what he says. The £600,000 for dilapidations sounds very expensive to have been accrued only in 5 years. Was there a schedule of conditions prepared when they entered in to the lease ?

 

[PhilTheFragger]

My mate is a chartered surveyor and his speciality is rent reviews. I will send him your text and see what he says. The £600,000 for dilapidations sounds very expensive to have been accrued only in 5 years. Was there a schedule of conditions prepared when they entered in to the lease ?

As there is no break clause, they are charging a premium in lieu of delapidtions .
It's a perfectly inhabitable office kept to a very high standard, but other offices in the block have been refurbed, so I reckon he is trying to get the firm to pay for his refurb.

It's a bonkers amount
Thanks for helping