In times of economic uncertainty, it’s even more important to ensure you’re getting the most from your business premises. When your income is no longer as secure as it once was, you need to scrutinise your costs and make sure you’re getting the maximum value.
But whether you’re operating from an office, a shop or a shed, how do you make sure that you’re getting the best deal?
Where do you stand?
It stands to reason that in business, the less property you occupy, the less you will be paying for it. So ask yourself this question: do we really need all this space? It may make sense to scale down, but often the property overhead – unlike people – is a fixed cost that is difficult to change in the short term. As with a super tanker, you can twirl the wheel as much as you like, but it takes time to change direction. Your flexibility depends on the terms under which you occupy your property. Is it a freehold, or a leasehold at a market rent with that most user-unfriendly device, the upwards-only rent review? In other words, is it an asset or a liability?
Assets
If your business is run from a property it owns, you’ve resisted the urge to sell and leaseback in the good times, and you’re not mortgaged to the hilt; you have flexibility. You could sell it or part of it, lease part of it, or grant licences. Any of these options could bring in extra income while allowing you to run a downsized business. You may even find your property is worth more as a residential building or for some other use.
Liabilities
If your business space is held on a lease, things become more complex. Average commercial leases last for about seven years, and each one is unique, so much depends on what the document actually says. A good place to start looking for savings is in your outgoings. Apart from rent, most leases oblige the occupier to pay rates and service charges. Look at the service charge clause and get hold of the last few years’ worth of records. Are they reasonable? Could they be challenged? Then look at the rates: have they been appealed? Are there grounds for a reduction, such as neighbouring building works?
Downsizing
If you do find yourself having to reduce your outgoings or the amount of space you occupy, the first thing to do is read over your lease. Look at the restrictions listed, particularly those which deal with assignment and sub-letting. Can you sub-let part of the property or create licences? Can you let it at market rent even if this is less than the passing rent (the rent you originally agreed to pay)? Is the user clause restrictive? Are there tenant-only breaks coming up?
Get a local firm of commercial agents in. Show them the space and give them a copy of the lease. Ask for a report on the following:
-
Sub-letting and assignment prospects – is there a market? What will you get?
-
What would you have to spend on the space to make it marketable?
-
Are there any wrinkles in the lease that you will need to sort out?
-
What will their fees be for advising you?
Some companies tied in to a difficult lease have chosen to liquidate the company as an escape route. This is not recommended. It can damage the reputation of a business and, in any event, may not work if there is a parent company guarantee.
Speak to your landlord
One option that is frequently overlooked is simply talking to your landlord. Things you could discuss might include:
-
Reducing the rent for a period of time, perhaps agreeing to an earlier rent review
-
Paying monthly rather than quarterly, as most leases stipulate, to help with cash-flow
-
Widening the user clause if it is restrictive
-
Widening the alienation provisions if the restrictions on assignment and subletting are restrictive
-
Trading upcoming tenant breaks for a lower rent
-
Extending the lease, again trading a longer term for a lower rent or a rent holiday
Ultimately, if you are anticipating cash-flow problems, there’s no substitute for dialogue. After all, your landlord does not want your business to go under and should be open to suggestions.
© Crimson Business Ltd. 2009