Companies need to ensure they analyse their leases in advance of January 2019
For owner occupiers and tenants the primary function of property is often to support the day to day operational needs of their core business. Property is considered in terms of annual occupational costs and future occupational requirements. The expansion of the business often occurs during rising rental markets when Landlords tend to have stronger negotiation position. During a contraction cycle of the business inflexible lease terms often means opportunities to reduce properties costs can be limited. For occupiers planning and controlling their occupational options is key and a greater number of Landlords now appreciate the importance of having a tenant with a sustainable business model and are prepared to look at their operational needs.
Balance sheets can be negatively or positively impacted from Property Values with control over fluctuations often left to the market cycles. Whilst leases provide tenants with timelines on future rent reviews, break options and lease expiries there can often be other opportunities that occur in a property cycle where occupiers can pro-actively add value or reduce their costs. For example an imminent sale of an Investment property suited to an institutional buyer may be an opportunity for a tenant to reduce the contracted rent on an over rented property in return for extended the lease term commitment. If the intention is to remain in occupation this may suit a tenant and provide rental savings. An audit of all property assets ensures there is a pro-active and targeted strategy to maximise real estate returns in tandem with operational needs.
Property Investors and their Asset Managers focus on the total return from Real Estate with both changes in rent and capital values combined delivering their target returns over a certain investment period. Lease lengths and contracted rent are often therefore key factors in negotiations and occupiers can benefit from removing break options/agreeing rent frees/rent reductions. With many occupiers facing rent reviews and rent increases in the short to medium term it is important to understand the profile of your Landlord or Tenant and see if opportunities can be maximised.
Identifying, anticipating and managing the opportunities that arise under leases for both Landlord and Tenants can significantly enhance the operational and investment efficiencies. The greater alignment of property commitments to business objectives is often challenging, particularly in cyclical markets. The strength of the recovery in prime property rents and values creates opportunities, as well as costs, for occupiers as well as landlords, particularly where refurbishment and redevelopment opportunities nave become viable.
While the lease terms available for prime properties have become more onerous on tenants over the last couple of years, the ban on upward only rent reviews and the use of turnover based rents in certain cases has provided tenants with more flexibility than previously. Advice on the lease structures and events such as rent reviews, break options, expiry / renewals and alienation are critical at inception and throughout the terms of leases.
Large scale occupiers generally have an in house Real Estate advisor whose focus is on executing the property strategy. However it is often the case that where Real Estate is not core to the business that it may not be pro-actively reviewed in terms of identifying opportunities to add value.
Along with Maximising Real Estate understanding and assessing the role Real Estate plays in the financials of a Company are key. Changes in Accountancy Standards is critical for Companies Balance Sheets. The International Accounting Standards Board (IASB) published IFRS 16 in January 2016 and this will bring more transparency to balance sheets with a requirement for companies to calculate it’s lease liabilities using a prescribed method that all companies reporting under IFRS will be required to follow. The new standards brings most leases on-balance sheet for tenants and removes the distinction between operating and finance leases. Landlord accountancy treatment between the operating and finance leases remain unchanged. The IRFS 16 standards supercedes IAS 17 Lease periods which begin on or after 1 January 2019 with earlier adoption permitted in certain circumstances. Property is often a key asset that companies lease and the greater the portfolio the greater the impact. Companies need to ensure they analyse their leases in advance of January 2019 and plan accordingly.
TWM are specialist commercial property advisors and ensure their advice is bespoke to a client’s needs. A pro-active and strategic approach to a property portfolio can result in reduced occupational costs or additional income or capital receipts from letting of vacant space or undertaking sale and leasebacks. In particular where Real Estate performance is not the core function of a business it is important that Tenants and Owners of property are kept informed of opportunities and ways to enhance their portfolios performance.
Michele Jackson is a director at TWM Property