Belfast Telegraph

Why inflated rents are holding back retail

Property Watch

By Joanne Hobson, RICS member and partner at RHM Commercial

Many homeowners in Northern Ireland who bought their homes at the height of the market still remain in negative equity because their home is worth less than their mortgage.

Where this is the case, talking to the bank or building society and re-scheduling the debt might help to make mortgage payments more affordable in the short term, but the hope is that house prices will increase in the longer term to push the value above the mortgage.

The same issue applies to commercial property leases, but with different consequences. Many businesses acquired premises before the recession and have been locked into 10 or 15-year or sometimes even longer leases at inflated rents. The retail sector has been badly affected by this issue. Our research suggests that more than half of prime retail properties in Belfast city centre are over- rented, paying substantially above market rent levels.

This can have a serious impact on the viability of a business because property costs are usually the second largest outgoing after staff wages. This means that a high rent can prevent a company hiring more staff or giving existing staff a pay increase.

The problem is compounded by the fact that most commercial leases incorporate 'upwards only' rent reviews, meaning that rents cannot go down even if the economy and market rents have fallen since the lease started or the last rent review. These upwards only reviews were banned in the Republic for new leases signed after February 2010, but the UK hasn't followed suit.

But there is light at the end of the tunnel for businesses whose leases are coming to an end in the next few years - the Business Tenancies (NI) Order 1996 gives companies the right to a new lease at the current market rent, even if that rent is lower than the rent they are paying and even if their existing lease says the new rent cannot be lower.

Many businesspeople do not realise that this is the case and assume that if they want a new lease the rent will be the same or higher. Furthermore, a tenant is entitled to a new lease on current market terms, ie, a short term lease or a lease with a tenant break clause.

It should be noted that landlords can take back possession of the premises under certain grounds spelt out in the 1996 Order and that tenants are entitled to compensation if the landlord wants to redevelop the premises or use them for his/her own business.

Again, this entitlement to compensation, based on a multiplier of the rating assessment, is not well known and many businesses are missing out on thousands of pounds (tens of thousands in some cases) that could help with relocation costs.

A word of warning: the notice provisions contained in the 1996 Order are quite detailed and technical - both landlords and tenants should take advice from a chartered surveyor who specialises in this area of work at least 12 months before the end of the lease, to ensure that the appropriate action is taken at the right time. In the case of an over-rented property, it is important for a tenant to serve a notice at least six months before the end of the lease, in order to benefit from a rent reduction at the earliest date. If no notice is served, the tenant must continue to pay the inflated rent until action is taken.

Belfast Telegraph

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