The relationship between UK landlords and tenants has become akin to a customer/service provider dynamic. Liz Peace looks at the impact the recession is having on this evolution, and why negotiation and co-operation is often better than confrontation
Landlords really need tenants. After all, an empty building is not going to provide much income, will quickly deteriorate and certainly does not paint a very happy picture for the owner or agent, whose forlorn letting boards are a constant reminder that a particular part of town is not exactly an overwhelming success.
Why is it then, in the UK at least, that the relationship between landlords and tenants appears to have been so fraught over the last decade, to the point where we only narrowly averted the threat of government legislation that would have taken away a big element of choice in our real estate market by banning upward-only rent reviews (and where, more recently, a group of influential retail tenants threatened a revolt if their landlords did not agree to change from quarterly to monthly payment of rents)?
Leaving aside for the moment the impact of the current downturn (which I will return to later), it is certainly the case that, in the UK at least, acknowledgment of the tenant as a customer and therefore someone who requires the full level of modern customer service that other industries provide has come fairly late in the day. But for most landlords, and certainly those in British Property Federation (BPF), it has certainly arrived and the nature of the landlord and tenant relationship has begun to change substantially over the last few years.
The industry introduced a voluntary Code of Leasing Practice, which was updated and re-launched in 2007 and which now provides a succinct and modern set of standards against which all landlords and their agents are urged to conduct negotiations for new leases.
Its underlying principle is one of flexibility and being prepared to offer terms the tenant wants, at an appropriate cost, whether a short-term fixed price lease or a traditional 25-year agreement with upward-only, five-yearly rent reviews. So far, 38 major landlords have signed up to the code and 23 of the leading agents and lawyers have agreed to put it forward to their clients as the preferred position at the start of any lease negotiations.
The BPF has also pioneered a Landlords Accreditation Scheme, known as CLAS, which allows landlords to display the CLAS kite mark if they agree to a follow the code and put in place a scheme of redress for those tenants who have a complaint. CLAS already has 36 signatories, who between them own some 350 million square feet of UK real estate.
Under the auspices of the Royal Institute of Chartered Surveyors (RICS), the industry has also launched a new Service Charge Code and has collectively pioneered a comprehensive Occupier Satisfaction Index, which is about to enter its third year (and yes, so far standards have been rising, albeit slowly).
These measures seem to have had a gradual impact and there has certainly been a marked shift towards shorter, and consequently more flexible, leases with the average length of new lease in 2008 being just 6.2 years. Moreover, with 63% of new leases being for five years or fewer, the whole issue of upward-only rent reviews has been neatly sidelined.
For some occupiers, however, the pace of change has clearly not been fast enough and their dissatisfaction has been exacerbated by the current downturn and concerns over their cost base and cash flows.
As a result, we have seen a recent revolt led by a well known group of retailers demanding a whole package of changes including monthly payment of rents (as mentioned above), and a new approach to rent reviews, insurance commissions and service charges.
The response of the UK property industry has shown an interesting blend of the new flexible approach to customer service and a firmness borne out of genuine concern that the unravelling of existing, and willingly agreed, lease terms would have a damaging effect on values, bank covenants and cash flows at a time when landlords are finding times just as challenging as their tenants.
Landlords have made it clear that when tenants are in difficulties they are more than willing to talk about changes to payment regimes. They have also agreed to offer monthly payments to small retailers. With a few notable exceptions, however, they have not been prepared to offer automatic and uncompensated changes to payment regimes for the retail community at large.
Under the leadership of Francis Salway, chief executive of Land Securities, they have, however, embarked on a pilot exercise in some key shopping centres to see how service charges can be managed more efficiently in order to bring financial benefit to both sides.
The BPF has led an initiative to identify improvements to the rent review process and has continued to promote an approach to insurance commissions based on transparency and the provision of full information.
There is no doubt that market conditions in the UK, and particularly in the high streets, will continue to prove challenging, and almost certainly the string of significant retail failures occurring over the period since Christmas will not be the last.
But while tenants may feel hard pressed and, as customers, demand even more concessions from their landlords, those landlords also have to think about their other customers, namely their investors and lenders, many of whom will have put in the cash on the basis of a specific set of conditions, which they believed would lead to an ongoing and secure income, and which will consequently dictate the scope of any additional flexibilities the landlords may be able to offer their tenants.
As always, the picture is rarely black and white, and both parties - landlords and tenants - will often end up feeling aggrieved that they have not got what they want.
In the long run, however, and once we begin to climb out of this recession, it is to be hoped that landlords and tenants will remember the benefit they gained through co-operation and negotiation rather than confrontation, and that the new approaches to managing leases that were borne out of economic necessity will lay the foundations for a whole new era of genuine customer and supplier - rather than old-fashioned landlord and tenant - relationships.
Liz Peace is CEO of the British Property Federation