Viewpoint - 26/04/2013

Big savings going begging

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As the new financial year begins, occupiers will be asking themselves how their business can make savings. Many could enjoy a more profitable year by reducing occupational costs, whether the savings come from rent, rates or service charges.

Here Ben Steer, Senior Surveyor in our Property Management team, explains how checking and challenging these costs can sometimes reap surprising rewards.

Big savings, sometimes running into millions of pounds, are going begging.

Why? Simply because thousands of occupiers fail to fully explore their options when it comes to reducing costs such as rent, rates and service charges.

As the new financial year begins, and the economic turmoil across Europe continues, many businesses will be analysing their costs and wondering where they can make savings.

The good news for occupiers is that the answer lies in their property, whether it’s a shop, an office, an industrial/warehouse unit, or any other commercial premises. As is often the case checking the small print is a great place to start. The devil is in the detail, as they say.

The bad news for landlords is that occupiers are becoming increasingly savvy when it comes to reducing costs, and with good reason – the potential savings are often enormous.

Service charges represent a significant proportion of total operating costs for most office occupiers, running into millions of pounds for some major companies. They are also one of the main sources of conflict between landlords and tenants.

So why is it that when negotiating a lease tenants often focus heavily on rent payable, but then almost sign a blank cheque for their service charge liabilities?

The devil is in the detail

By checking and challenging service charges even small businesses can make savings that could be vital to their continued survival or greater success.

The first question a company needs to ask is ‘are we being over-charged’? To help identify cost savings opportunities, it is important to check the following common scenarios:

• Is there vacant space?
• Has your service charge liability or insurance premium increased?
• Has your landlord run into financial difficulties or even entered into administration?
• Are you aware of any planned refurbishment works or environmental upgrades, or have any recently taken place?

Occupiers should ensure that they are charged in accordance with their lease obligations and that: landlords are spending their money wisely; they are not paying to upgrade their landlord’s premises; charges are fair and reasonable; they have sufficient information to budget wisely; and that landlords are complying with the Royal Institution of Chartered Surveyors (RICS) Code of Practice.

We have made substantial savings for our clients through challenging service charge liabilities and recovering incorrect payments, recently saving a Government department over £1million and a staggering £3.5million in service charges and insurance premiums for another major corporate occupier.

While representing a Plc client, in one case alone we were able to identify savings of £410,000 in backdated payments for the previous five years. On another asset, we saved £141,000 at the end of the service charge year through identifying inconsistencies and miscalculations with the lease. As a result, no extra sum was due.

Occupiers must take control and check liabilities

Mark Clapham, Director in our Rating team, enforces the message to occupiers to take control and check their occupancy charges. He adds: ‘Through the provision and delivery of a comprehensive service covering appeals, rates mitigation initiatives in respect of underutilised space, and a specialist rate management service, we have saved clients millions of pounds over the course of the last five years.’

And the savings don’t stop there. With rents forming the largest overhead after staff costs for many businesses, it makes sense to explore opportunities to restructure leases. With landlords keen to retain tenants they are often open to negotiation. To a large extent, it’s a tenants market.

Even if your lease end date isn’t imminent there are still opportunities to restructure your lease on more favourable terms and savings, once again, can be significant. Lease expiries, breaks and rent reviews can provide further opportunities to negotiate potential rent reductions, rent free periods, future break options or the removal of future liabilities such as dilapidations.

It is all money that rightly remains within the business, allowing for further investment, job creation and innovation, rather than going to landlords or into the Chancellor’s coffers.

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