Have your Right Head on when Negotiating

“I know the Landlord, he’s incredibly nice. We get on so well. The agent is really helpful too.”

How many times do I hear that?

I don’t doubt it. I know lots of very nice landlords too, not to mention their equally helpful agents. I’ve been both but is that a reason to approach negotiation of the terms that will go in a lease (called ‘Heads of Terms’) any differently?

We are doing this on behalf of the company, in whose best interests we are required to act. If we don’t thoroughly negotiate the ‘Heads of Terms’, confirmed in writing, we might be in for some surprises later, wasting hard earned cash and even putting the success of the company at risk?

Of course, we can negotiate ‘Heads of Terms’ in a civilised atmosphere of mutual respect and collaboration but let’s not kid ourselves; the process of agreeing terms is fundamentally an adversarial one. We shouldn’t be diverted from our key objectives by existing relationships.

Let’s focus on the needs of the business as expressed in the business plan, as if the landlord is a complete stranger. One day, if circumstances change, he might be.

If we follow this course, our property strategy will guide us towards the ‘Heads of Terms’ we are seeking and we will send a comprehensive agreement to the lawyers that works for the business – and there you have it, a lease that works for the business with no surprises!

It’s uncanny…

It is uncanny.

Quotation: “If only our ‘tenant clients’ would hire someone like you, it would be so much quicker and easier for us – and cheaper for the client; not only that, the client would get a better deal!”

It happened again the other evening, in Winchester. There I was chatting away in a group that included a Commercial Property Lawyer and out came the same comment I always hear when I tell a Commercial Property Lawyer what Culverwell Consulting does for its clients.

Businesses are leasing and purchasing premises all the time, without the business owner seeking bespoke Commercial Property advice. A DIY job. The transactions mostly go through and sometimes there is not very much contention but it is often a struggle for the tenant’s solicitor to undo the damage without being so frank they lose the instruction; and usually some uncomfortable compromises are forced on the business owner, who is unaware of just how much they have given away unnecessarily.

Time, money and stress are the costs to a business owner conducting the transaction without independent property advice. Doing a “DIY deal”. The solicitors tell me so – every time.

“The solicitors must be able to sort it out. Isn’t that what they get paid for”. You might think so but in fact – to their frustration and their clients’ detriment, the deal has been done – crystallised – by the time it lands on their desk. Too late to change the fundamental terms. Too late to wind the clock back and begin where we should have begun.

The usual wrangle ensues between landlord’s solicitor saying “This is an agreement. We are not willing to change anything”; and the business owner’s solicitor trying to rectify the worst mistakes that have in all innocence, been allowed into the agreement by the DIY business owner.

The curious thing is it is such a well-recognised and acknowledged scenario.

And often it is the things that aren’t included in the heads of agreement, that have the greatest potential for detriment. Things the business owner ought to have thought of but it’s too late. None of it is rocket science but it has the potential to blow up. Worse still those little errors and nuances can simply just sit there, ticking, almost unnoticed, until they go off.

“If only our ‘tenant clients’ would get bespoke property advice, it would be so much quicker and easier for us – and cheaper for the client; not only that, the client would get a better deal!”

The value of knowing where to hit it

I noticed this old story circulating again, recently.

It’s such a great illustration of what it is to be an expert and how others who may be expert in their own field, can miss and potentially undervalue expertise in others. 

You know the one – it’s about the expert engineer called in to fix the machine and the owner questioning his invoice. The punch line goes something like: “£55.00 for attending site and tapping the machine with my hammer – and £1,000 for knowing where to tap it”. 

We might sum expertise up, as the ability to notice, recognise and deal with things others simply miss. Expertise may not have direct monetary value. It may not be so complicated it can’t be understood by others when explained (“it’s not rocket science”) but it can nevertheless be remarkable. Another great example of what expertise is, was at the Olympics, in the diving pool. 

Watching the divers, we all became “arm-chair experts” looking at the slo-mo and replays, commenting on over rotation and “ooh that that must have stung!”. 

However, we were not judging, the judges were; and what is remarkable about them is that they didn’t see the replay in slow motion from all angles as we, the arm-chair experts did. They were making their decisions in those few seconds it took the divers to get from the platform to disappearing beneath the surface of the pool, based on their expertise and the ability to see the detail in a dive “in real time”. Quite clearly, they could see in that moment, so much we missed, often even after the replays! They are experts and that’s why they were in the position of making decisions that led to medals.

In business, wise operators will surround themselves with experts who complement their own knowledge and experience. They don’t try to cover all the bases (jack of all trades) but focus on what they do best, buying in advice, support and guidance through their network. They don’t see it as a distress purchase but an investment.  IT, HR, property, law, marketing and so on; they invest to the extent the experts deliver the benefits to offset the time, cost and stress of “winging it”.

Who wouldn’t rather have an acknowledged expert on their side when they step outside their core skill set? What will we miss that the expert will (1) see, (2) understand and (3) either turn into an advantage or perhaps compensate for to mitigate a downside? The worst case is that we never find that out and go on paying for the mistakes! In our opening example, that could be the difference between the broken machine firing up as before because the expert dealt with it, or it being replaced as unrepairable because the expert was thought “too expensive”; a potential cost difference far greater than the £1,000 the owner questioned.

What’s your favourite illustration of expertise?

You know the one about the butterfly?

You know the one about the butterfly flapping its wings in the Amazon rain forest? Or more pertinently, the end of double tax relief on owner-occupier mortgage interest (MIRAS) back in 1988/9? Well, adding 3% SDLT (stamp duty land tax) on buy-to-let purchases might have a similar effect on the property market. Apart from anything else, it is market intervention, which I thought wasn’t a particularly Tory thing to do.

If you are asking: what is a commercial property trainer/mentor/adviser doing concerning himself with the residential market? Well history tells us that the residential market broadly leads the commercial market in its ups and downs. So it matters a good deal to my clients, whether they realise it or not.

Many people prefer to rent rather than buy the place in which they live. For many, getting/having a mortgage is either not appropriate or not desirable. They are in temporary/contract work; they are students; they want to live in an area before they buy; or perhaps they just don’t want the burden of owning. For all those people, the availability of a good stock of well-maintained and managed residential property, large and small is vital.

“Well-maintained and well managed”? What about all the terrible stories we see on the TV about water dripping down walls and extortionate rents? That is again a supply and demand problem that the extra 3% SDLT isn’t going to improve. A ready supply of well-maintained and managed stock would help. And of course, the vast amount of well-maintained and managed stock doesn’t make headlines.

If the demand from buy-to-let investors dries up or even reduces, the availability of rentable houses and flats also diminishes. Demand will outstrip supply and the price (rents) will go up. That’s not too complicated to see. Added to which the same newsworthy “unscrupulous landlords” in the will have less reason to improve their stock.

The Government’s intention may be that a penal rate of SDLT will increase the availability of properties to owner occupiers and thus cause a fall in the price, helping as it does, first time buyers. Sorry, a key component of the buy decision is that the value of the property is going to increase afterwards? And which house builder will carry on building at the smaller end of the market when what they build sells for less than last year?

Of course many a fortune has been made and lost trying to second-guess a market but we can only hope that this innocuous little market intervention will not have the sort of unintended consequences that the end of double mortgage interest tax relief had.

You can’t trust advice from a bloke at the pub…

My recent post with this opening comment attracted more than average attention, perhaps because it rings true with many.  It was prompted by that the following ironic scenario.

I was referred to talk to a couple of entrepreneurial young guys, eager to start a business together.  They were full of enthusiasm, which is always great to see.  They had identified the ideal unit for their business and wanted our advice and guidance on negotiating the terms of the lease with the agent acts for the landlord.

However, as their story unfolded and they identified the building; and as they set out their business model to me, there was a flaw in the story they were telling me, so clear that I could not allow the conversation to go forward without explaining to them, the basis and context of my concern.

Thankfully, after initial surprise about what I was telling them, they could see exactly what I was saying and why.  They understood the concern I had about their ability to succeed in their plan, with this issue unresolved.  My view is that it won’t be worth the time and cost to overcome.

I have suggested how they can ‘bottom out’ the matter and make a judgement about whether the object of my concern was truly fatal to their strategy.

cc-pubThe point of the story is this: whilst it had already been recognised that there was an issue, they had been told by more than one person “no, that won’t be a problem at all”, which in their enthusiasm, they had willingly accepted.  Where had that advice been given?  Well, in the pub of course and clearly by people who lacked the professional understanding of the issues and the experience to advise!

The irony that struck me as I was explaining the reality and magnitude of the challenge, was that we too, were sitting in a pub.  Hence the conclusion of the tale is…

“…unless the bloke happens to have 32 years’ experience doing exactly what you’ve asked about!”

You meet your client’s needs. That’s enough isn’t it?

You and I, walking along in the middle of Portsmouth. Someone calls out from a car: “I need to get the Isle of Wight Ferry! I am in a hurry!”

Sounds reasonable enough and if someone called through their car window asking for directions, we might well just tell them how to get to the ferry.  Why would we not?

But let’s unpick this a little and pretend for a moment, we’re experts in getting to the Isle of Wight. Who isn’t?
We have met our client’s needs. We answered their question, for which they might be entirely satisfied. Job done. In other circumstances, they might be quite prepared to pay our fee. But have we really done the best job we can for them – as experts in our field?

Our client has said they are in a hurry.  Because we are experts in getting to the Isle of Wight, we actually know there are many ways to do that.  All different and each one ‘the best’ in certain contexts.  So we take a moment to find out what the client’s ultimate objective is and what their needs are, beyond finding the ferry terminal.  We find they have a meeting in Cowes and then they’re coming back. We then find we are able to advise on the best way to reach that ultimate goal.
It turns out the ‘best way’ for them is, in fact to catch the hovercraft.  It is quicker to cross and by leaving the car behind, cheaper too. 

Two wins for the client and we have actually shown ourselves to be not just helpful in meeting the client’s needs but expert in guiding them towards a better solution; one they had not contemplated. Even though they had all the data, they didn’t have the skills, knowledge and experience to realise that ‘better solution’ from it.

That’s what experts do.

Premises – asset or liability?

There are so many factors to consider in relation to the space a business occupies. People tend to look at it only from their own perspective. What it really comes down to is whether you, as a business owner/operator, view your premises as an asset or as a cost. If you look at your premises in the same way you would a member of your staff, then simply put, you get out what you put in.

To begin with, you have to make the right decisions at the time you acquire (lease or buy) the space. Allow plenty of time for this analytical stage to avoid having to make compromises you may live to regret. It forms the basis for everything else you do. How big, where, what specification and more subtle things like natural light, parking and mobile signal – think of it like a ‘job spec’ for the property. What does the business need? It requires interrogation of the business plan, which is not always an easy exercise from within the business.

Then, once you have committed your business, during the period it occupies the property, you may need to adapt and alter to suit the changing requirements of the business so it can make best use of what it has; moving internal walls, for example or even just decoration and carpets. Compare this to training a staff member to keep them fresh and relevant.

Lastly there needs to be an exit strategy, which has been ‘planned-for’ and which does not disrupt the business with unforeseen costs and upheaval. This is the same as when it is time for an employee to move to pastures new. You don’t want a big bust up or worse, for it to go legal!

Look upon your business accommodation as you do a member of your staff and it will become an asset, adding value to the business and facilitating its growth; and not just a high cost, inflexible business overhead.

Don’t have premises unless you absolutely need them

Don’t have business premises unless you absolutely need them.  That is one of my mantras. 
I have just had my windscreen replaced.  The process was interesting but the really interesting thing was to hear from the guy on the tools, how the screen replacement company has changed working practices and so reduced its property overhead quite dramatically.

Instead of having a portfolio of industrial units across the country for fitting glass, at a cost of millions every year, they all operate from vans.  The orders are sent to the van and the materials are picked up from a sort of oversized safe-deposit box.  There is an office somewhere dealing with the admin but the industrial units are a thing of the past.

The rationale is that carrying a vast property estate just makes the business cost heavy and therefore vulnerable.  Better to run vans you can sell if you need to and flex the headcount to meet demand. 

The main point being the company profits are increased by not carrying the massive liability premises represents, some of it unquantifiable, and using innovation and technology to deliver the service.

So, think about it – don’t have premises unless you absolutely need them!  If you do, have the right premises in the right location, on the right commercial terms.


It is not all about the rent

If we only agree the length of the lease and the amount of rent, we have left perhaps a dozen other terms and conditions which will not be tailored to the needs of the business. Does that matter?

In a typical commercial lease of about 40 pages, you can expect about 1½ pages to be clauses the landlord agrees to be bound by. They will vary depending on circumstances and they are a topic of another article. The point being that the other 38½ pages will include obligations, liabilities, duties and costs which fall upon the business, as tenant. Is there another contract in which a business owner would leave that much to chance?

It is always easy to negotiate on matters we understand. Money and time are in that category. How much and for how long. Knocking the rent down always feels positive and we may even get some time at the start of the lease before the rent kicks in – rent free period. The landlord has said how long the lease is to be, so that’s OK. But is it?

It is not that common to be in a position to negotiate. We don’t bargain over our trolley of shopping or a tank of diesel so it is understandable that when presented with a contract containing dozens of terms, the business owners may not know where to start to make it work for the business. If you don’t know what you don’t know, you are a bit stuck going forward.

What we can’t do is leave it to our solicitor to sort out. By the time it goes to the lawyers, the deal is agreed – crystallised – and cannot easily be “unagreed”. To try, is a very unsatisfactory and costly, up-hill struggle.

So how does a business owner get to grips with the opportunity a new commercial lease presents, to tailor its terms to the needs of their business? A good starting point is their own business plan. As the road map of a company, the business plan defines a whole range of parameters for the business: what it does, who it sells to, how many staff it employs and what skills they have, what technology it needs and so on. It is equally possible to use the business plan to help decide what premises it needs and the right lease terms.

So, by generating a property strategy from your business plan you can determine the physical attributes of the premises that will best suit your business – where, what size, what equipment; and then the terms it is going to be necessary to negotiate within any agreement – lease or licence, and therefore give your business the best chance of succeeding in its new premises.

Culverwell Consulting advises SMEs and start-ups on the complexities of acquiring business premises, through training, mentoring, full service consultancy, and using 30 years’ experience in commercial property transactions. Call, email or visit the website to find answers to your questions.

A new lease of life

A new lease of life: businesses would surely achieve better terms if they knew how

An interesting article in a recent issue of Estates Gazette, by John Forbes QC and Vivien King discusses how commercial lease terms could be improved and clarified. As the vast majority of lease terms are burdens on the tenant, it follows that such improvement and clarification would have the effect of making the lease more realistic and even fairer to the tenant.

A select number of experienced real estate solicitors and support lawyers considered and discussed why lease terms are not evolving and becoming more explicit.

The rather sad summary of the problem [for business] is and I quote “… a landlord … is usually resistant to changes …” and “The client [the business which is about to become a tenant] wants a lease at an agreed rent to be drafted and agreed as soon and as cheaply as possible and apparently is not much concerned about trying to change and improve current practice”.

The article concludes with the massive understatement that this “is arguably not in the long term interest of the property industry.” It doesn’t mention that it is certainly not in the long or short term interest of business occupiers.

For a business to rebalance the landlord and tenant relationship and make the best advantage of its strengths, it needs to understand:

  1. Businesses are the critical ingredient in the success of landlord’s investment model, without which that model fails. As such, the business has a strength of negotiating position, which will bring significant value and reward if properly exploited.
  2. There are many complex elements to consider, which make up “the right premises” for the business. A well thought through business plan is a good starting point.
  3. How the lease permits that business to occupy, can significantly affect the success of the business. The scope for negotiation on a ‘give and take’ basis to obtain the key terms identified in the business plan, will yield valuable results, short and long term.

Commercial property is not on the daily agenda for business owners, unless you are a landlord. This mismatch of familiarity and breadth of knowledge can lead to unequal outcomes for the business but it doesn’t have to be that way.