Changing commercial property from a liability to an asset

Twenty five years after the development boom of the late 1980s, early 1990s, property that was then prime is, in many cases, now coming to the end of its useful life. But with careful planning, these properties, rather than being a liability, can become an asset with minimum cost as long as the right plan is in place, according to property, building and project consultancy Tuffin Ferraby Taylor (TFT).

Dan Henn, partner at TFT explains: "In 2013/2014 we will see a peak in the number of 25-year leases coming up for renewal. Many of the elements of these properties will have come to the end of their design life. This together with the availability of new properties deters tenants from signing a new lease. Now is the time to start planning for these lease ends in order to avoid lengthy periods of vacancy or, in the worst case scenario, obsolescence. It is also an opportunity to consider sustainability enhancements that meet statutory requirements and market needs."

The first issue to consider is the process of dilapidations. Many occupiers that have full repairing and insuring (FRI) leases may not have paid too much attention to the upkeep of the building and, in normal lease-end circumstances, substantial work will have to take place to get the property back to its original state. However if the building is going to be knocked down or substantially refurbished there is little point demanding the tenant spends time and money on carrying out these works only for further work to be undertaken by the landlord.

Rather than the exiting tenant carrying out works themselves to restore the property, here the landlord can come to an arrangement on dilapidations costs which can save money and time for both parties and also help avoid any potential disputes that may arise.

TFT encourages property owners to think ahead here: "If work needs to take place to get the property back to its original state, why not consider what else needs doing at this point in order to present the building in its best light, aid future marketing and ultimately command the highest rent. Also, market expectations have evolved since the development boom, so what was the right specification then, may not be now."

"The key is timing," says Dan. "By working closely together to agree key decision dates in the dilapidations and re-letting design, the dilapidations consultant and project manager can get the building back to the market as soon as possible, minimising the amount of time the property stays empty and avoiding costly business rates. We have been able to shave weeks off our clients' build programmes enabling the property to be let sooner than expected."

Design and specification is also an important consideration: "Tailoring the design and specification to align the building with market demand is essential to achieve the optimum rent and to let it quickly," says Dan. "We are also finding that sustainability is increasingly important to both landlords and occupiers with closer attention paid to environmental and energy ratings."

Legislative sticks are also important for landlords. A key one being the Energy Act 2011 where the Government proposes that landlords will be unable to let non-residential buildings with an EPC rating of F or G from April 2018.

Dan explains: "Landlords are now finding that they have to put in place more measures to future-proof their buildings not only in terms of their physical attributes but also with respect to leases (and the inclusion of green lease provisions). If property owners anticipate regulatory and market changes now, cost effective sustainability solutions can be implemented."