Jon Ely, senior associate, Lewis Silkin
13/08/2010
Landlords need to sweat their commercial property assets but they must not overlook their residents
Faced with a future with much less grant and with private funding available at much higher cost, registered housing providers must look at new ways of finding cash. For many, their commercial property assets will be the answer.
Commercial units are no longer regarded as secondary to residential portfolios. Most providers are now far more aware of the need to ‘sweat’ commercial portfolios, while balancing the ethos of protecting residents - but not so many know how to do this. If the balance is right and a good commercial approach adopted, the rewards can be significant. Here are five key steps to achieve this difficult balance:
Step 1: choose your stance
Should housing providers protect their residents or get the best commercial value? Is commercial activity purely subsidiary to the housing ethos, or is the provider unwilling (or financially unable) to lose good commercial tenants? A registered provider must decide where it can draw the line.
Step 2: know the key battlegrounds
There are major negotiation battlegrounds where tension between the competing interests of residents’ protection and getting best commercial value manifests itself. Achieving a manageable balance is key. Providers must look at:
Use of the premises
Residents want:
* restricted use (for example, no take-aways or dry cleaners) unless in keeping with development;
* no change of permitted use;
* restricted hours of use (for example, no night use, which is more restrictive for shops than offices);
* no smells, fumes, refuse or noise;
* proper estate management and regulations.
Commercial tenants want:
* business flexibility - wide use, 24/7;
* marketability - ability to assign/underlet to other businesses (for example, shop to office);
* value for its market rent/premium.
Alterations
Registered providers want to control:
* exterior air conditioning, ventilation, ducts and pipes, cables, aerials and dishes;
* shop fronts, signage and appearance.
Commercial tenants want:
* freedom to improve the premises/business. A possible solution would be to allow installations only in out of the way areas; ‘lift and shift’ provisions in the licence to enable the moving or removal of installations.
Assignment and underletting
Registered providers want:
* no assignment/sub-letting of part of the lease, no sub-letting if using a short-term lease;
* control to ensure only good new occupiers.
Commercial tenants want:
* marketability; sub-letting income stream.
Service charge
Registered providers want:
* regime to fit whole development;
* fullest recovery;
* limited/flexible services obligation.
Commercial tenant wants:
* limit service charge to exclude cost of services which are exclusive to residential parts;
* financial caps/limits if using a short-term lease.
Step 3: be consistent
Heads of terms and standard commercial leases should reflect the registered provider’s chosen stance. Avoid management headaches by making terms equal between commercial tenants, and ensure negotiators are clear on the limits of any flexibility.
Step 4: increase awareness
Ensure estate agents communicate any residents’ protection terms to prospective commercial tenants, to save wasted effort if any are deal breakers. It is better if the tenant is aware early rather than waste time and money.
Step 5: police and enforce
It’s no good having a carefully pitched stance and set of leases, if the managing agents are unaware of the letting terms. Everyone who needs to know must actually know and implement a tight enforcement regime. A tenant soon forgets restrictive terms if these are not enforced early.
Jon Ely runs the Registered Providers Commercial Property Forum
jonathan.ely@lewissilkin.com
Consent: do social housing providers need permission from the Tenant Services Authority for a commercial sale?
Registered housing providers might need to obtain Tenant Services Authority consent under section 172 of the Housing and Regeneration Act 2008 for disposals of commercial property - even though at first glance, section 172 appears only to apply to social housing dwellings.
Disposal includes granting an easement such as rights of access. A dwelling includes anything belonging to the dwelling. Strange as it may sound, the right for a commercial tenant to use a communal bin store will be a disposal requiring TSA consent.
The transaction might fall within category 19 of the TSA’s general consent. If so, the housing provider must comply with the general consent conditions and formalities.
Section 172 introduces concepts of ‘social housing legacy’ and ‘prior dwellings’. Under these rules, section 172 consent might be required for a disposal of a commercial unit where the land was previously housing property and/or comprised a dwelling.
The TSA is still considering how it will interpret all of the section 172 legislation, but for now its working policy is set out in the booklet Disposing of Land, which is available on the TSA’s website.
The bottom line is that social landlords should probably consult with the TSA’s consents team and/or consider seeking formal advice when making any form of disposal of commercial property.
From Inside Housing published on 13/08/2010
