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Property market: Read the small print

Renewal time for property leases can be an expensive and highly stressful period for the heads of dealer groups.

Franchise standards frequently drive up the level of investment for a showroom into millions of pounds. So to be dropped into a situation where the landlord wishes to redevelop the site rather than renew a lease agreement can be an expensive lesson for dealers.

Tom Howell, a partner at law firm Clarkslegal LLP in Reading, says this is just one of the issues that his auto retailing clients have faced lately.

“In some cases, at least the problem might have been avoided by proper strategic planning. And in all cases, awareness of the lease terms and the legal implications would at least prevent nasty surprises,” he adds.

In one instance, a dealer client was forced to vacate a showroom at the end of a 10-year lease because the landlord, another motor retailer, had plans to expand its own operation into the premises.

Howell says, in that case, the landlord was only liable to pay compensation of one times the rateable value of the property. That’s because the tenant had been operating on the site for less than 14 years.

Another case concerned a client who had been in a location for 20 years. During this period the motor dealer had invested a large amount of money in showroom improvements. Yet the tenant was unable to oppose the landlord’s redevelopment plans because a break clause was included in the lease.

“There would be no compensation for tenant’s improvements unless the tenant went through a certain procedure before carrying them out, and most do not,” says Howell. “The landlord would have to pay compensation, but it will only be twice the rateable value of the premises – nothing like enough to compensate the tenant.”

Property consultants Plato Enterprises points out that reforms in the law from June 2004 go some way to help tenants. One measure scrapped the requirement for tenants to serve a ‘counter notice’ within two months of receiving a Section 25 notice to terminate from their landlord if they wish to fight the termination. But they must still apply to court by the date specified in the Section 25 notice in order to open negotiations.

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