Historically, tenants signed up to a service charge liability with no clear idea on what that might be and how it was likely to change over time. Meanwhile, Landlords had a clear rental income stream and Tenants suffered due to fluctuating service charge bills. Is there an alternative?
According to our research, Tenants are begining to protect their position to a far greater extent, with many more service charge caps and all-inclusive rents. If this trend continues, it is Landlords that will suffer the fluctuations. In turn, this directly impacts the net rent (after deducting service charge shortfalls) that they are able to secure across the let parts of their scheme.
Given the challenges of the market, neither is attractive, well balanced, or even commercially viable in the long run.
Providing greater control of recurring service costs to occupants is one solution. This might be an extension of a Traders Association (or similar arrangement). This has been used at some of the larger schemes to finance marketing initiatives. With each occupier able to vote on key changes to service arrangements, service providers, or even to play a key role in appointing the Centre Management team. This is about splitting the recurring operational services away from other Landlord based asset management initiatives. Similar to the shareholder based approach to the management and control of Business Parks.
Another is to accept a move to all-inclusive turnover based rents. Leaving the Landlord to make value-based decisions on service provision. With a clear incentive to actively seek out the optimum service level and cost. This approach was once adopted by a group of Factory Outlets. Note of caution: If you have turnover rent and a conventional service charge, the Landlords incentive is to drive turnover through service provision and marketing, even to the extent that it eats into the tenants profit.
Many will be giving this some thought.
Right now we are seeing a lot of retailers and leisure occupiers reducing their liability with caps and all-inclusive rates. That trend looks set to continue.
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