Proactive Commercial Property Management with Reference to UK Law - Essay Example

? Introduction A commercial lease represents a contract in which the intending occupiers (tenants) are facilitated to occupy another party’s commercial property (the landlords), for a limited period. Leases detail legal documents that pursue to regulate the relationship between landlords and tenants as cautious as possible. Commercial leases remain mainly drafted by, and to the advantage of landlords; hence, tenants should take significant care in entering into such leases. Majority of the commercial leases is of a certain form detailing a Full Repairing and Insuring Lease (FRI). Landlords mainly prefer this form of lease given that they are responsible for all repairs in the period of the lease and the tenants settle insurance and other costs linked to the property. Under FRI lease, tenants are essentially responsible in conducting the repair and maintenance of the property. This highlights the needs for tenants to attempt to negotiate restrictions to this obligation. In the event that the FRI lease is applicable to a section of the premises, the repairs can be mainly undertaken by landlords, although, they will pursue to recover from the tenants the expenses incurred in the repairs through a service charge. As an ideal, the tenant liabilities should align with the property leased (Grabel 2011, p.109). In numerous cases, the freeholder may be deemed accountable to arranging the repairs in the event that the repairs impacts on the structure of the building or within the shared areas, but the leaseholders may be necessitated to pay a section, or all of the costs involved (Garner and Frith 2010, p.115). Largely, all leases outline that the leaseholder is responsible for looking after the occupied premises, which entails: internal decorations, repairs to appliances and furniture, repairs to floorboards, and repairs to plasterwork; nevertheless, the freeholder may be additionally responsible for arranging other forms of repairs such as the roof. In this case, it is apparent that repairs to the roof remain critical, and leaseholders have to pay for the repairs as the lease provides (Abbey and Richards 2009, p.6). Service charges represent the cost availing services to a certain area. Given that leases differ from one estate to another, there cannot be a solitary standard wording to the clauses demanding that a leaseholder to pay service charges. All leases compel the leaseholder to pay ‘service charges’ at the period and in the manner admitted in the lease (Abbey and Richards 2012, p.198). The core objectives of a service charge policy centres on accurately setting the provisions to align with the requirements of the Housing Corporation’s regulatory code. Key legislation relating to Proactive Commercial Property Management Landlord and tenant Act 1985 This outlines the core ground rules employed in setting service charges and outlining service charges, outlining the requirements for reasonableness, as well as for prior consultation of leaseholders. Section 18 (1) of the Act outlines service charge as the amount that is payable to the tenant dwell as a constituent or addition to the rent. The amount is payable, either directly or indirectly, to cover services, repairs, maintenance enhancements or insurance, landlord’s costs of management (Boyce and Lake 2006, p.75). Other provisions include Leasehold Reform Act 1993 that awards leaseholders the right to enquire for a management audit in cases where service charges re disputed; housing Act 1996 that awards leaseholders the liberty to appoint and investigate the cost of repair works in cases where they are unreasonably high; common hold and leasehold reform act 2002 seeks to herald controls on additional administration charges. These entail amounts payable by a tenant as a section of or in further to rent (Kelsen 2007, p.357). A recent Court of Appeal case featuring Campbell v Daejan Properties Limited [2012] EWCA Civ 150 has served as a critical reminder to landlords. The lease of the maisonette (the premises) detailed and responsibility on the part of the landlord to repair and maintenance of the roof of the premises necessitating Mrs. Campbell to settle 40% of the landlords costs. Mrs. Campbell asserted that the ‘premises’ remain defined as the maisonette, and as such, her contribution should be towards the 40% of the costs of repairs to the maisonette, and nothing further. The court of Appeal judgement overturned High Court’s judgement, whereby the judges cited no apparent error within the drafting of the lease, and there was no presumption that the landlord entitled to recover all its costs (Hinkel 2012, p.464). Although, the outcome of the case can be regarded as specific to the individual facts, landlords ought to take note of the warning given that they do not enjoy a routine entitlement to reclaim all their costs. Background to the Case In the outlined case, the owner of the office block is facing some letting voids. The tenants are responsible for maintaining the property in repair (the interior of the demised premises). The service charge incorporates costs expensed by heating and lighting and maintenance of the lift within the common parts, the maintenance and where essential the replacement of the common parts. Mr. Jacks, whose company is struggling to survive, has rent and service charge arrears and his lease does not have a guarantor. Mr. Jacks perceives continued pay of the rent and service charges at the current level, inclusive of the arrears, as unfeasible. Mr. Jacks recognizes that the owner may be unwilling to accept a surrender of the lease. With regard to the service charge, Mr. Jacks asserts that he can only settle one quarter’s outstanding charge; but cannot only settle the second completely. Mr. Jacks offers to settle the payments within the two year period, but wants a cap on the service charge. The proposed payments are unlikely to cover any section of the cost of significant works to the roof. Although, this is an attractive offer, the owner recognizes that it is hard to find another client to replace Mr. Jacks. What can be done best to safeguard the client with regard to Jack’s & Co? In charging the service charge, I will ensure that equal apportionment of the repairs spread to new tenants. I also intend to negotiate with leaseholders so as to gain a fixed lower open market rent. Service charges essentially levied to recoup the costs that they incur in availing services to premises. The charge covers areas regarding general maintenance and repairs services provided, insurance of the building, central heating, lighting, and cleaning of the common areas. A lease avails the landlord with an opportunity to recoup his expenditure for the maintenance and repair; however, the landlord may not be awarded the chance to make a profit based on management. Similarly, the landlord can be expected to exercise reasonableness in a ‘reasonable’ way with regard his expense on the premises. The outlined undertakings guided by the Landlord and Tenant Act 1985, which establishes the basic rules for service charges, outlining what is perceived as a service charge, as well as the necessities for reasonableness and conference of leaseholders (Edwards and Ellison 2004, p.12). The lease, in this case, avail a fixed charge that is to be levied in which the charges cannot be varied. Majority of the service charges grounded in actual or estimated cost of services and as such, differ from one year to another. Service charges essentially vary and may increase or decrease, but the landlord can only recoup only those costs deemed reasonable (Sexton and Bogusz 2011, p.404). The landlord’s authority to levy a service charge and leaseholder’s obligation to settle it draws from the provisions inherent in the lease (Morris1999, p.136). There are several issues that ought to be evaluated for the landlord is to be capable of recovering the costs, including works of improvement, legal costs, management costs, caretaking and porterage, and heating. Decision with regard to the works on the roof and the recovery of the costs from the service charge The core aim of the agent rests on ensuring that the building does not in any event fall into disrepair and guaranteeing that the leaseholders align with their commitment and avoided void periods. As per the outlined scenario, 50% of the property is already let, but at a higher rent the leases will expire within the next 2 years. My proposal would be to undertake the significant works on the roof now while 50% of the building is letting. Subsequently, I would serve a schedule of dilapidation to those leaseholders who would in turn complain about the cost at which point negotiate with them that, as a proposal, we would grant them new 7 year leases with a fixed lower open market rent for 5 years, which would compensate for the upfront repairs, future service charges would also be low since the property would be up to date. Rent review would be upward only in year 6. For the new tenants, the requirement would equal apportionment of the repairs. They would also have a 7 Year lease with review in year 6 but a break at year 5. The rent would be open market rent at 50% discount for year 1 to 3 and full rent 4 to 5 with review in year 6. Rent review process is geared towards maximizing the financial return on the property. The relationship between landlords and tenants, or their respective representatives should be cultivated through regular contact. Commercial leases bearing long-term provisions usually detail rent review provisions that outline when the rent review will take place, the process of review, assumptions that are to be arrived at when valuing the promises of the objective of rent review, process to be undertaken, and the provisions relating to any disputes. The review will be guided by the revaluation within the open market, whereby the rent review computed as per the present market rate at the date of the review (Miller and Jentz 2008, p.329). Can the landlord, in any event, recover 100% of the costs through the service charge? Service charges are paid by tenants, as part of, or further to rent, and/or ground rent designed to satisfy the cost of any services availed by the landlords. The landlord can recover 100% of the cost of availing services to the tenants by charging variable service charge. The core objective, in this case, rests on recovering 100% of the costs of availing services via the service charges rendered by the tenants. The variable service charges, in this case, are structured according to Landlord & Tenant Act 1985. The present secure tenants paying fair rent are liable of paying a fixed service charge, and where the properties let on secure tenancies rendered vacant, the properties can be re-let based on assured or assured short hold fixed term tenancies bearing a variable service charge payable. A full repair (FRI) details a lease that places accountability for the repair of the peripheral, internal, and structural set-up of the property in the tenant. The obligation seldom varies from tenant to the tenant, and mainly encompasses guaranteeing that the property remains sustained to a tenantable standard. An FRI lease represents lease that compel full repairing and insuring obligations on the tenant, alleviate the landlord from liability occasioned by the cost of repairs and insurance. The bulk of the leases of commercial property is essentially of this form, awarding landlords heavy protection and guaranteeing that the landlords have heavy protection from numerous costs as possible to the tenant. For the tenant entering into a full repairing and insuring lease, it is essential to consider sourcing the services of a surveyor so as to scrutinize the state of the premises. As a result, and through the consent of the landlord, the tenant may be able to introduce into the contact a schedule of condition. This will avail a record of the state of the premises at the launch of the contract, and the tenant will be conscious of any critical structural damage to the property that may necessitate constant repair (Kyle, , Spodek and Baird1999, p.62). Concessions and inducements that might be offered to Mr Gill to secure the letting Concessions can be availed with the aim of drawing tenants to vacant properties, or in periods where the tenant decides to renew the lease. Offering concessions hinges largely on the circumstances within the market, although, it may be motivated by undesirable factors connected to the property. As a commercial landlord, it is possible to award rent concessions devoid of conceding too much (Rose 1973, p.66). Given the challenge that manifest in the property market, it is incumbent upon the landlord to avail concessions so as to attract selective clients such as Mr. Gill. In doing so, any prudent landlord should pursue the most profitable form of concession(s) and concede only that which is pertinent to luring Mr. Gill to take up the premises. As such, one ought to pursue only those forms and mix of concessions that leave the landlord in the best possible situation to preserve the benefits of the lease transaction. As such, the margins of an inducement package may be restrained only to the necessities and ingenuity of the landlord and the tenant (Meislik and Horn 2010, p.487). Some of the inducements minimize a tenant’s encompass start-up costs for move-in and initial institution of the new space, as well as connected to related charges such as freight elevator charges. The bulk of concessions seek to minimize the amount that the tenant is required to pay with regard to base rent, taxes, operating expenses, or percentage rent within a distinct prescribed lease period. In any scenario, the core focus centres on availing the mix of concessions that are most suitable for a given collection of circumstances. The most dominant mode of rental concession centres on minimizing the rent (Meislik and Horn 2010, p.3). Other forms of concession include moving allowance, signage for commercial properties, and higher allowance linked to tenant enhancement projects or amenity upgrades. Characteristically, lease transactions encompassing concessions adopt a direct approach in which the landlord avail cash allowance for the tenant’s construction to its original space enhancements, and/or awarding a rent to minimize the tenant’s rental costs within the beginning of the lease term. The rent credit may interrupt the flow of initial revenue within the initial lease term, and does not necessitate that the landlord come out-of-pocket. Some tenants usually opt for free rent since it offsets other cash outlays that the tenant may make at the start of the lease term. Free rent/rent credit does not enable a tenant to circumvent paying rent, rather it represents a mechanism for ingeniously structuring the rent payment within a lease transaction (Boobyer 2004, p.364). Mr. Gill (the incoming tenant) can be awarded a rent free period to cover the period that Mr. Gill expects to spend fitting out. Mr. Gill would prefer to occupy one of the suites on the top floor of the building. This necessitates contemplation on whether the patchworks on the floor will be done immediately. Furthermore, based on the market conditions, Mr. Gill will be capable of negotiating some mode of inducement in return for engaging into a lease (Wyatt 2007, p.193). Issues relating to fitting out rent free periods and inducements mainly crop up during rent reviews. Largely, close to all reviews demand that the valuer fix the rent perceived as reasonably attained on a hypothetical letting. Fitting out costs draw from the capital cost of the work itself, and loss occasioned from the usage of the premises while the fitting is being undertaken. The strengths linked to rent credit include: that the tenant mainly welcomes possessing lower rent costs while beginning or relocating the business (Pawlowski 1999, p.32). Serve a schedule of dilapidation to those leaseholders Where a building manifests multi-occupation, as is the case, it is reasonable for repair and maintenance, and services to be overseen by a landlord, with the costs covered from tenants via service charge. A schedule of dilapidations can be awarded at the end of the lease, or during the lease term. In such as event, the landlord can be expected to instruct the surveyor to examine the property and come up with a schedule (American Law Institute 209, p.70). The schedule incorporates items such as the necessitated remedial work, items deemed in disrepair, the clause within the lease that relates to each item, as well as the projected expenditure of the repair. Furthermore, the schedule may incorporate items such as loss of rent expensed during the period, as well as the expenditure of the repairs. A schedule of dilapidation can be served at any moment during the lease, and up to 12 years subsequent the termination of the lease is under seal, or 6 years subsequent to the termination of the lease is under the hand. However, some leases enforce other caps with regard to timing of the service. The dilapidation schedule is not fashioned at profiting the landlord, but any claim that is levelled by the landlord should be directed at returning the landlord at an equivalent position as if the tenant had wholly performed their lease commitments (Grabel 2011, p.315). This draws from the fact that leasehold operations bestow the right to reside in and trade within premises, subject to numerous conditions, for a fixed period, and in return of payments of rent. Majority of the leasehold agreements are assignable given that they can be purchased and sold within the open market and subject to approval of the new purchaser by the landlord. The case of Proudfoot v Hart provides a yardstick on matters relating to repair to that suitable form a property of that nature instead of a new condition (Garner and Frith 2010, p.115). Common law and The Landlord and Tenant Act 1927 place an additional cap on the degree of dilapidations that can be maintained, outlining this as the degree of the damage to the landlord’s reversionary interest, frequently highlighted as diminution (Morris 1999, p.136). It is essential pursuing specialist advice with respect to the degree of repair that is suitable. In strict terms, the landlord has the option of applying to the courts at any moment to terminate the lease (forfeiture); nevertheless, this seldom occurs in the event that the lease is in its final eighteen months, and courts often tend to be sympathetic in cases where the tenant nears the end of the lease term. There are various forms of schedules of dilapidations, namely: interim schedule (made within the lease term); terminal schedule (made within the last three to the lease term); and, final schedule (which is made subsequent to the expiry of the term). The Act safeguards against forfeiture devoid of leave of court and also bounds the repairs that can be imposed to those which that are necessitated to sustain the value of the landlord’s reversion, and those that might not be a statutory requirement. The overall cost that the landlord can suffer centres on the depreciation in the worth of the property emanating from disrepair. Conclusion The obligation to repair can be construed a duty to place a property into good repair so that the tenant guarantees that the property remain well maintained and adorned. Undertaking repairs can be regarded as a complicated task to leaseholders, especially in the event that the work required impacts on more than one leaseholder within the same premises. The core objectives of serving a schedule centres on guaranteeing that the property sufficiently repaired and maintained. This may be undertaken at the tenant’s expense. It is critical that the tenant comply with the repairing covenants given that the landlord can seek to forfeiture of the lease in the event that the tenants fail to meet their obligations. In such circumstances, the landlord can employ a schedule as a lever within other negotiations with the tenants that may not be connected to the repairs, and at the end of the lease, the landlord can opt for a cash settlement. References List Abbey, R. M., & Richards, M. B. (2012). Property law handbook 2012-2013. Oxford, Oxford University Press. Pp.198. Abbey, R., & Richards, M. (2009). A Practical Approach to Commercial Conveyancing and Property. Oxford, OUP Oxford. Pp.6. American Law Institute, American Bar Association, & American Law Institute-American Bar Association Committee on Continuing Professional Education. (2009). Manual on commercial leasing in troubled times: forms, checklists, and advice. Philadelphia, Pa, ALI ABA.. pp.70. Boobyer, C. (2004). Leasing and asset finance: the comprehensive guide for practitioners. London, Euromoney Books. Pp.364. Boyce, T., & Lake, C. (2006). The commercial manager. London, Thorogood. Pp.75. Edwards, V., & Ellison, L. (2004). Corporate property management aligning real estate with business strategy. Oxford, UK, Blackwell Science. Pp.12. Garner, S., & Frith, A. (2010). A practical approach to landlord and tenant. Oxford [England], Oxford University Press. Pp.115. Grabel, G. (2011). Wealth opportunities in commercial real estate management, financing and marketing of investment properties. Hoboken, N.J., Wiley. Pp.109. Hinkel, D. F. (2012). Essentials of practical real estate law. Clifton Park, Delmar Cengage Learning. Pp.464. Kelsen, H. (2007). General theory of law and state. Clark, Lawbook Exchange. Pp.357. Kyle, R. C., Spodek, M. S., & Baird, F. M. (1999). Property management. Chicago, Real Estate Education Co. Pp.62. Meislik, I., & Horn, D. (2010). The commercial lease formbook: expert tools for drafting and negotiation. Chicago, Ill, American Bar Association, Section of Real Property Trust & Estate Law. Pp.487. Meislik, I., & Horn, D. (2010). The commercial lease formbook: expert tools for drafting and negotiation. Chicago, Ill, American Bar Association, Section of Real Property Trust & Estate Law. Pp.3-4. Miller, R. L., & Jentz, G. A. (2008). Business law today: the essentials : text & summarized cases--e-commerce, legal, ethical, and international environment. Australia, Thomson/South-Western West. Pp.329. Morris, J. R. (1999). Principles of landlord & tenant law, London, Cavendish Publishing. pp.136. Pawlowski, M. (1999). Leasing commercial property, Oxford, Chandos Publishing. pp.32. Rose, J. G. (1973). Landlords and tenants. New Brunswick,Transaction Books. pp.66. Sexton, R., & Bogusz, B. (2011). Land law: text, cases, and materials. Oxford, Oxford University Press. pp.404. Wyatt, P. (2007). Property valuation in an economic context. Oxford, Blackwell Pub. Pp.193. Read More