The Landlord’s Dilemma in a Falling Market

The last couple of years have been tough on everyone, including both landlords and tenants.

In difficult economic times, rents are bound to soften, but landlords can find it difficult to ‘smell the coffee’ and instead hang on for rents that aren’t going to materialise.

Knowing the state of the market

We recently had a client where a change in personnel led to us being asked to review their current lease. It transpired that they were paying well over the market rent, which the previous management had signed up to relatively recently. 

Understanding lease terms and breaks

While we might not normally have been able to do anything to help them mid-term, it happened that there was a break clause in the lease, the date for which was imminent. 

While the client had no desire to move, we advised them to exercise the break in order to give time to evaluate the options.

What are the tenant’s strengths and options?

We entered into negotiations with the landlord on behalf of our client, a well-established business with an excellent covenant. More than that, they had a track record of paying rent to this landlord.

With their business established in this particular building, remaining in place would certainly have been the easy option.

Negotiating a reduction in rent

We genuinely believed that in the light of the current market and with comparable evidence from our recent projects, it would be possible to come to a reasonable accommodation with both parties. 

Evidence was presented to the landlord who refused to countenance anything? (anything more than a modest reduction?) and seemed oblivious to the change in the market and to the benefits for him of security of tenure.

Evaluating alternatives

With the landlord unwilling to concede that the rent he wanted was not in line with the market, we set about seeking alternative premises.

As expected, we found a new building that the client was happy with, which in fact had significant advantages and where we were able to negotiate much more favourable terms.

A final conversation with the landlord established that he was still unwilling to accept a rent reduction, so our client vacated the premises in accordance with their lease and moved into their new office and showroom.

Landlord’s position

The vacated property remained empty for about a year and although it was later re-let at the same headline rent, it was with a significantly shorter term than we would have agreed to and to an occupier with less strength of covenant. 

The void and rent-free periods to the new occupier combined to a significant cost to the landlord who went forward in a worse position, for no other reason than his own hubris.

This is not an uncommon position – we have heard of many other cases where tenants were prepared to stay with a rent adjustment, but intransigent landlords were unwilling to accept the change in the market and end up worse off as a result.

Lessons for landlords in a falling market

Those landlords who look beyond headline rent to understand the tenant’s options and market conditions and are prepared to agree to fair market terms, will be those who achieve security of income. 

Simply putting on blinkers and holding out for an unachievable rent only leads to vacant buildings. Agents who advise this approach, perhaps in the hope of larger fees for themselves,  are doing their clients a disservice.