28/07/2014

By Edward Neaves, Partner and Head of Lease Advisory, Vail Williams

When commercial property goes wrong the financial shocks can be devastating — and SMEs are particularly vulnerable. Yet investment in sound, professional advice is often mistaken for extravagance. Here I chart how a trusted advisor can help SMEs navigate the risks to enjoy the business benefits.

First things first: the European Commission describes an SME in terms of having fewer than 250 employees and annual turnover of less than £40 million a year.

But one only needs to look around the profusion of UK companies carrying that tag to see there’s no one-size-fits-all prescription for how they should work, organise or plan for the future. Skills, knowledge and the marketplace — nothing is identical.

That’s precisely how SMEs should manage their property arrangements. Whether it’s offices, retail or industrial premises, each solution is unique for issues which can be missed until too late: a slow bleed of cash, strangled expansion, or the frightening impact of big costs.

That’s the challenge for SMEs which, in many ways, are actually the powerful engine room of the UK economy. Because of their relative scale, businesses can be damaged very suddenly by the unseen risks of mismanaged commercial property.

The defence — expert advice from professionals in commercial property — can often be viewed as an extravagance. Yet as well as avoiding the threat of unpleasant shocks, there are more tangible gains that day-to-day strengthen the balance sheet.

For Vail Williams, it starts before the lease is even signed. SMEs by their nature often need to be flexible to grow and shrink, and a common mistake is to be chained by leases that haven’t been negotiated with a mind on what the reality might be a few years later on.

That might include naively accepting break clauses that are so arduous to engage that an organisation might be stranded for another five years, for example, in a premises it is desperate to leave. Too big, too small, wrong area — such a trap can kill a business.

Even if a building is successfully vacated, the escape might be hit by expensive dilapidations that could have been expertly deflected, for example, with a more tenant-friendly schedule of condition limiting the costs.

Those are the dangers; but for a successful SME, getting those protections in place can positively clear the way for its expansion plans.

As well as fending off the major threats, there are cumulative benefits from getting professional advice to minimise the monthly costs from rent, service charges and business rates.

Agreeing to rent increases linked to the Retail or Consumer Price Index, for example, might appear simple to manage, but when better options can be negotiated it’s a needless drain on resources which could be reinvested into the business.

An example of how one company seized the opportunity was Vantage Insurance Services. Vail Williams’ Occupier Services team helped to shrink its rent bill by about £100,000 at offices in Brentwood, Essex.

Using local knowledge of the market and expert negotiating tactics, Vail Williams secured an agreement between Vantage Insurance Services and its landlord whereby it would not use the break option in exchange for the rent being reduced.

The intervention saved Vantage Insurance both from paying rent that was above market value and the alternative expense of moving premises. For the landlord, it maintained a value tenant with good relations.

The Brentwood case shows how it can be done — with a little help. Each SME, however, depending on its strengths and weaknesses, will need a different route map..

To expect businesses to have the expertise to answer every combination of challenges is asking a huge amount of its management, which is why having on tap professional expertise and the connections they have is a major asset.

Having a guide to lead the business through every stage — from finding the property to the expiry of the lease — doesn’t just mean step-by-step support, it means having another pair of eyes scanning the horizon.

By Edward Neaves, Partner and Head of Lease Advisory, Vail Williams

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