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Greater freedom for Scottish commercial landlords in recovering the cost of repairs

Commercial landlords in Scotland could find it easier to reclaim repair costs following a decision by the country’s highest civil appeal court.Does this development represent a positive step, or will it add to tensions between landlords and their tenants?

Repairs: a long-standing argument between landlords and tenants

Commercial lease contracts require tenants to keep properties in “good and substantial repair”, which means heating, electrics, windows and roofs must be maintained. This can prove costly over time, especially as contracts can run for years.

Agreements typically include a clause allowing landlords to request tenants to arrange repairs whenever they’re needed. To avoid disputes, however, such requests are often submitted when the lease comes to an end; tenants usually have the option to carry out the repairs or pay a settlement.

As a protective measure, landlords often insert payment clauses into leases to ensure that tenants remain liable even if the repairs or the settlement are disputed. However, a number of court decisions had effectively made these clauses unenforceable unless landlords could prove that the repairs were completed or about to be completed.

The court's decision and what it means for landlords

In the case – @SIPP (Pension Trustees) v Insight Travel Services Ltd – the tenant disputed the payment clause on the grounds that the landlord planned to sell the property and, therefore, didn’t intend to complete the repairs. On the other hand, the landlord argued that the clause explicitly held the tenant liable for the cost of remedial work, regardless of whether it intended to do the repairs.

Scotland’s Inner House of the Court of Session sided with the landlord, deciding that, because the payment clause was clearly specified, the onus shouldn’t be on the landlord to have to prove their intentions to undertake repairs. Rather, the responsibility lies with the tenant to pay.

The ruling is good news for landlords, but those with tenants already in commercial rent arrears should bear in mind that the decision has the potential to cause added financial strain. Landlords looking to secure rental incomes and increase their cash reserves may wish to enlist the help of ethical enforcement agent Dukes Bailiffs.

Calls in Northern Ireland to penalise commercial landlords over empty properties

A Northern Ireland assembly member has called for commercial landlords to be penalised if they leave city centre premises vacant for long periods of time. What are the reasons behind this proposal, and are there potential financial implications for commercial landlords?

Ó Muilleoir’s proposal: rates paid on a sliding scale

Máirtín Ó Muilleoir, a Member of the Legislative Assembly (MLA) for South Belfast told the Belfast Telegraph that developers in the Northern Irish capital need to be encouraged “to bring the [empty] sites back into use”. He suggested the problem lies in the fact that some developers don’t pay rates on properties that “have been lying vacant for seven or eight years”.

The MLA has said that developers should have to pay business rates on properties that remain vacant, and that these should increase the longer a premises remains empty. If the plans go ahead, the current business rates relief for buildings with removed roofing tiles would no longer apply.

“It’s my conviction that by levying rates on derelict commercial premises and building sites, we can spur economic activity”, Mr Ó Muilleoir explained to the newspaper. He was speaking after news came that Belfast’s Carryduff Shopping Centre, which has had part of its roof removed, may be set for closure.

The parliamentarian also expressed his belief that banks, many of which assume control of derelict buildings following a company’s administration, “should be sharing the rates burden” with private enterprises.

Is the proposal likely to take effect?

Business rates in Northern Ireland are currently being scrutinised by the Department of Finance and Personnel. Mr Ó Muilleoir said he hopes its review “can start the process” of landlords paying rates on empty and derelict properties.

Landlords are yet to comment on Mr Ó Muilleoir's proposal, but one point of contention may be that many feel compelled to take on tenants – who may not be financially secure in the long term – to avoid paying rates on vacant premises. Rent defaults may therefore be a real possibility if the MLA’s proposal is drafted into commercial property law. Landlords can safeguard against this uncertainty by ensuring they have professional and ethical procedures in place to recover rent arrears.

Economic pressures expected to impact commercial property returns, expert warns

The commercial property sector is bracing itself for June’s EU referendum and the possibility of rising interest rates, both of which could affect investors’ returns. What impact could these politico-economic developments have?

Economic pressures

Marcus Langlands Pearse, who co-manages the Henderson UK Property fund, has predicted that potential rising interest rates and the uncertainty surrounding the UK’s EU membership could hamper commercial property returns.

In an interview with financial information provider Citywire, Mr Langlands Pearse said that diminished returns will be particularly felt in London, where investments largely come from abroad. “Many overseas buyers have suspended further investment [until the referendum result],” he explained, “particularly in the larger lot sizes.”

However, some sectors appear to be faring better than others. While retail is facing up to the challenges posed by online shopping, the so-called alternatives sector – including data centres, hotels and student housing – is coping much better. According to Mr Langlands Pearse, this is down to “long leases, strengthening covenants and good relative pricing”.

Short and long-term outlooks

Mr Langlands Pearse’s interview with Citywire suggests that returns “are likely to be more muted in the coming months”, but the long-term outlook may be more positive. The commercial property market is more apprehensive than it once was, but fund managers and finance experts are generally remaining upbeat. This is because commercial property has a habit of recovering. While returns were -22.1% after the financial crash in 2008 – according to the IPD UK Annual Property Index – they grew to 17.8% in 2014 before falling to 13.1% in 2015.

Nevertheless, in the coming months diminished returns may be an unfortunate, albeit short-term, reality for the UK’s commercial property market. With investors putting their plans on hold, and less capital flowing in and out of the sector, it’s possible that landlords may feel the effect. However, with financial planning that aims to eliminate commercial rent arrears, property owners can safeguard their cash flows during these uncertain times.

Businesses pay more for commercial property than previously thought, BCO report reveals

Businesses are spending more on real estate than was previously assumed, a new report from the British Council for Offices (BCO) has revealed. How much are companies really spending on property, and what impact will the new findings have on commercial tenants and landlords? The previously accepted wisdom

It is widely held that for most businesses, salaries account for 80% of their total outgoings, office space 10% and other expenses a final 10%. According to Bill Page, the BCO’s Research Committee Chairman and Business Space Research Manager, this “rule of thumb” has been relied on by the property industry “for many years”.

Mr Page added, however, that this assumption has become outdated: “Ultimately, our analysis found that while salaries continue to dominate overall costs, property and non-property business costs play a greater role than accepted industry wisdom.”

How much more commercial property costs

The BCO discovered that property is more likely to account for 15% of a business’s expenditure. It arrived at the figure after analysing business data collected by the Office for National Statistics.

The study specifically looked at four industries: real estate; professional, scientific and technical; administrative and support; and IT and communications. With the sectors having combined outgoings of approximately £429 billion, the BCO’s key finding is being regarded as more accurate than the previously accepted figures.

The impacts the BCO's findings may have

Mr Page has said the updated proportions will enable businesses to be “more informed” when it comes to taking property decisions, and investors will “better appreciate the implications rental growth has to affordability.”

It’s also possible that the BCO’s findings could affect the medium to long-term rental forecast, while policymakers may take them into account ahead of possible changes to business rates.

Meanwhile, landlords may find businesses that hold on to the previous 10% rule become more likely to default on their rent – increasing the amount of outstanding payments. Landlords can protect their businesses from this eventuality by ensuring they have effective and ethical procedures in place for commercial rent arrears recovery.

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