As the second largest cost after staff, property plays an important role in business. With the recession far from behind us, and the full implications of the country’s deficit yet to spread into the wider economy, cost savings will still be high on the agenda for all businesses moving forward.
This article outlines a number of options for tenants and landlords to consider in the quest to further reduce their property costs.
Opportunities for tenants
If you are a tenant, now is a good time to ask for better terms on your lease. If you are coming to the end of a lease or have the option to serve a break notice, or are due a rent review, think about negotiating hard on renewal terms. Landlords do not want empty property on their hands, particularly older properties that are harder to let in the current market.
Since the abolition of empty property business rates relief, most landlords benefit from only three months grace for non-industrial premises and six months for industrial premises before having to pay the full amount of business rates. It is better for a landlord to have a tenant paying a lower rent than no tenant plus a business rates bill on top.
This is an ideal opportunity to re-gear a lease to your current business strategy. Much can be achieved by simply agreeing to remain in occupation of your
property rather than moving at the end of the term, or exercising a break.
If the location is good then think about renewing, but on lower rental terms or perhaps with a contribution of capital from your landlord to improve the fabric of the building or for better internal fit out. It is also an ideal time to address the issue of dilapidations and agree a reduction in reinstatement obligations.
Research shows that many businesses could use just half the space they currently occupy. Again, if you are coming to the end of your lease or thinking about exercising a break clause, can you reorganise your business to operate out of a smaller space reducing rent, business rates and other overheads?
Space, particularly within office buildings, may be only 50%-60% used on any given day because of holidays, sickness, meetings off-site and the increase in “hot-desking” and home working.
Equally, up to 15% of floor space can be taken up by filing and storage. Off-site storage can often be found at substantially lower rates than main office rents with electronic storage reducing costs even further, reducing your carbon footprint and limiting the need for travel.
Relocation itself may not seem immediately attractive given the disruption and additional costs, but there will be plenty of landlords willing to offer incentives which may go a long way to meeting those costs and providing better accommodation for the business in the long run. It is worth seeing what is out there – if only to use as a negotiating tool!
Where there is no natural break in your current lease, landlords may still be willing to negotiate midterm to secure, for example, a longer term even if for a lower average rental and revised letting terms.
So consider reducing the amount of rented space the business uses and generating extra income by sub-letting part to another occupier. Whether or not this is possible will depend on existing lease terms. However, landlords may prefer to consent to such an arrangement where it secures the viability of an existing tenant and avoids a potential insolvency.
The opportunity to rent a small area where there are existing facilities is often attractive to a smaller start-up business and can be done on flexible terms so that you can expand back into that space should demand increase again.
An area of expense that often gets overlooked is service charges. Often these just arrive as invoices from the landlord, without any questioning of how the expenses have been incurred. Look at the service charge clauses and get hold of the last few years’ records and accounts. Look for unusual increases in any particular costs and management fees – are they reasonable? Can they be challenged?
Opportunities for property owners
If you own your building and have not sold and leased it back in the boom times, you have further flexibility. You could sell or let out part.
Even on a lower rental this may produce a significant cost saving if you don’t have to pick up the rates bill. There may also be additional savings on security and insurance, which could be recharged to a tenant.
Obviously you will be competing with the rest of the market but it could provide extra income. Your building may possibly have a greater value as an alternative use and it may be useful to get some specialist advice as to your options.
Business rates are often the third highest cost for small businesses after rent and staff costs. Non domestic rates are a tax on the right to use and occupy commercial property and are based on rental values.
Rateable values in England and Wales are set independently by the Valuation Office Agency every five years and the current values have just been set, effective from 1st April 2010 but based on a rental valuation date of 1st April 2008 when rents were at their peak. In Scotland, business rates are dealt with by Scottish Assessors; in Northern Ireland, the next revaluation is not due until 2015.
You can check your business rating online on the VOA website www.voa.gov.uk. If you are unhappy with the rating assigned to your premises, you may have grounds to appeal if, for example:
- you think the new rateable value is incorrect;
- if any part of your property has become exempt from liability;
- there has been a material change of circumstances which might affect value, such as a change of use, a change to its physical state or a change in the locality.
Appealing your rateable value
You can choose to appeal your rateable value direct with the Valuation Office Agency, and it’s free. Alternatively, there are many rating agencies which will do this for you. It is important, however, to choose a reputable agent who is professionally qualified and who will provide detailed information as to the likely costs involved.
Remember that a reduction in your rateable value will not necessarily equate to a reduction in the amount of rates payable. This is because there are other reliefs and exemptions for which you may qualify before coming to the correct calculation of your rates bill.
In England, small businesses are generally entitled to small business rate relief if they occupy one property and the rateable value of their premises is less than £18,000 (£25,500 in London). The Welsh Assembly funds its own small business rates relief scheme. Northern Ireland has a hardship relief scheme.
After its last budget, the previous government announced a temporary increase in the level of small business rate relief so that eligible ratepayers pay no rates on properties with rateable values up to £6,000 with a tapered relief of between 100% and 0% for properties with values between £6,001 and £12,000.
The new levels of relief were to be available for 12 months from 1st October 2010 and are being kept by the Coalition Government. If you think you may be eligible, you should contact your local authority to seek advice as to what to do to make a claim.
If you have already moved out of your premises and they are empty, is there anything you can do to
mitigate your outgoings? It may be possible to avoid paying empty property rates, or at least reduce your liability. Again, check your rating assessment.
If your rateable value for 2010 is significantly higher than for 2005, then you may be entitled to some transitional relief. Check with the Valuation Office Agency that you are receiving all allowances and reliefs.
If your property is a listed building it will receive the full exemption from empty property rates.
If you are entitled to small business rate relief then you might consider re-occupying the property, as empty properties do not qualify for the relief and the rates payable by a ratepayer who qualifies may be less than the rates payable on an empty property.
Deal with your energy efficiency
Now may be the time to really deal with your energy efficiency. Heating and hot water used in your building can amount to half of all your energy costs. Installing an energy efficient heating and hot water system, having it regularly serviced and operating it effectively so that it is set to turn off when it is not needed, will save you money.
As the government is keen to impress upon us, it will also reduce your carbon footprint and help combat climate change. There is help including 0% business loans and carbon surveys available for businesses from organisations such as the Carbon Trust to go “green”. See www.carbontrustco.uk for more information.
The key message is to not assume that the property costs are fixed and unalterable. With a little time and effort it’s quite possible to make changes that will help your bottom line