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Introduction
The information on Shop Investment is about
successful
investing in shop property.
To be any good as an investor, it helps to have an understanding of both the medium in which you're investing, and the psychology of investors. Often the value of a shop investment depends not so much upon the intrinsic worth of the property, but upon the mood of the moment.
One question that every investor should ask themselves is "why?" Answering that question honestly and truthfully will supply the answer to all manner of questions that can stem from it. Your answer to 'why?' will provide a tangible direction for your aspiration. In my opinion, there is no point in investing out of fear, or just to get away from something, such as low interest rates for cash on deposit, or the volatility of stocks and shares, or the hassle of residential buy-to-let. If you do that and venture into a type of investment that you may not know enough about, then you could fall prey to all manner of problems and end up being worse off.
With shop property, one worst thing that could happen is that the property becomes vacant and unlettable at a rent that would give you a proper return on your investment; and whilst you are hoping to attract a tenant, the building is deteriorating and empty property rates are clobbering you. The other thing is foreclosure and being made bankrupt. Of course, the worst may not happen: but what does happen more often than not is that the investment fails to perform: the rent never increases and the value falls.
Many investors become successful, despite mistakes. Often, their achievements outweigh the cost of mistakes, but all that means is that they have benefitted from market momentum. When the market changes, as it does and sometimes suddenly, negative events can overtake achievements. To maintain success on a positive note without coming unstuck in times of change requires a different way of thinking and a different approach from the start.
Successful investment is about trusting intuition, but an informed intuition, not merely an intelligence guess. Informed intuition comes from years of experience of how to appraise. Appraisal must be objective, free from bias. It's not about whether you like or dislike a certain type of property, but whether the property you are appraising would pass investment tests. The tests themselves are also not subjective: what you personally like or dislike may not be what someone else would like or dislike.
With shop investment, I don't profess to know it all. I never get involved with the money-side of things, such as mortgages, etc. Because I rarely have investments for sale, I'm not someone whom most people would associate with the shop investment market; and you won't see my name on estate agent boards. What I do have are three attributes that set me apart from the crowd. Firstly, I find it easier to originate than copy which means I'm good at finding angles. Secondly, I have tremendous practical experience and in-depth understanding of rent review, business tenancy law and shop rental valuation. Thirdly, I'm able to read between the lines and listen to what's not being said. All in all, my approach to shop investment encompasses the technical expertise of commercial property know-how, with the application of holistic principles at a deep level of understanding.
Shops are everywhere and we all go into shops at some time in our lives, (albeit not everyone likes shopping), and it can be easy to imagine yourself reasonably conversant with what shop investment is about. But, there's a big difference between being a customer and serving customers. It is not until you have worked in a shop that you discover what it's really like. Even if you have experience behind-the-counter, chances are it's not until you are privy to the confidences of owners of retail businesses that you get any understanding of the thinking behind-the-scenes. Even then you might only get half of the story: for the full picture, and to succeed with shop investment, you need to understand the nature of dynamics in the relationship between the retailer as tenant of the landlord's property.
To be any good as an investor, it helps to have an understanding of both the medium in which you're investing, and the psychology of investors. Often the value of a shop investment depends not so much upon the intrinsic worth of the property, but upon the mood of the moment.
One question that every investor should ask themselves is "why?" Answering that question honestly and truthfully will supply the answer to all manner of questions that can stem from it. Your answer to 'why?' will provide a tangible direction for your aspiration. In my opinion, there is no point in investing out of fear, or just to get away from something, such as low interest rates for cash on deposit, or the volatility of stocks and shares, or the hassle of residential buy-to-let. If you do that and venture into a type of investment that you may not know enough about, then you could fall prey to all manner of problems and end up being worse off.
With shop property, one worst thing that could happen is that the property becomes vacant and unlettable at a rent that would give you a proper return on your investment; and whilst you are hoping to attract a tenant, the building is deteriorating and empty property rates are clobbering you. The other thing is foreclosure and being made bankrupt. Of course, the worst may not happen: but what does happen more often than not is that the investment fails to perform: the rent never increases and the value falls.
Many investors become successful, despite mistakes. Often, their achievements outweigh the cost of mistakes, but all that means is that they have benefitted from market momentum. When the market changes, as it does and sometimes suddenly, negative events can overtake achievements. To maintain success on a positive note without coming unstuck in times of change requires a different way of thinking and a different approach from the start.
Successful investment is about trusting intuition, but an informed intuition, not merely an intelligence guess. Informed intuition comes from years of experience of how to appraise. Appraisal must be objective, free from bias. It's not about whether you like or dislike a certain type of property, but whether the property you are appraising would pass investment tests. The tests themselves are also not subjective: what you personally like or dislike may not be what someone else would like or dislike.
With shop investment, I don't profess to know it all. I never get involved with the money-side of things, such as mortgages, etc. Because I rarely have investments for sale, I'm not someone whom most people would associate with the shop investment market; and you won't see my name on estate agent boards. What I do have are three attributes that set me apart from the crowd. Firstly, I find it easier to originate than copy which means I'm good at finding angles. Secondly, I have tremendous practical experience and in-depth understanding of rent review, business tenancy law and shop rental valuation. Thirdly, I'm able to read between the lines and listen to what's not being said. All in all, my approach to shop investment encompasses the technical expertise of commercial property know-how, with the application of holistic principles at a deep level of understanding.
Shops are everywhere and we all go into shops at some time in our lives, (albeit not everyone likes shopping), and it can be easy to imagine yourself reasonably conversant with what shop investment is about. But, there's a big difference between being a customer and serving customers. It is not until you have worked in a shop that you discover what it's really like. Even if you have experience behind-the-counter, chances are it's not until you are privy to the confidences of owners of retail businesses that you get any understanding of the thinking behind-the-scenes. Even then you might only get half of the story: for the full picture, and to succeed with shop investment, you need to understand the nature of dynamics in the relationship between the retailer as tenant of the landlord's property.
Mistakes
A dynamic modern economy does not lend itself to
allowing plenty of time to stop and think before we
do anything. Often, things are done in a hurry (in
some cases in a semi-permanent dream-like state)
and it may not be until after we've had a chance to
relax that we realise something should've been done
differently.
The main reason mistakes happen is that investors assume and presume. They assume their knowledge of shops, retailers and leases is enough to go on. They may not presume what they're told is necessarily correct, but they assume the questions they ask are the questions to ask.
Investing in commercial property is not like residential property, and shop property is not like any other form of commercial property investment. Of all the mistakes investors make when buying a shop property investment, possibly the two biggest are:
1) to buy on initial yield, and
2) to buy on the strength on the tenant's covenant.
When you buy on yield, it is easy to compare the return on offer with the sort of returns available elsewhere, but that does not make for successful investment. (Buying yield is the bank talking!) Similarly, although tenant covenant makes sense in terms of the rent paid on time, you are likely to be paying a premium for that attraction, and that can be confused with value and might not be sustainable long-term.
Another classic mistake is misunderstanding "upward-only" rent reviews. Assuming the review is to market rent, and not some fixed formula, such as index-linking, what "upward-only" rent review actually means is that the passing rent payable after rent review will not be less than the rent payable before the review (assuming no adjustment for stepped-rents): it does not mean the rent must necessarily go up, simply it cannot go down.
Also, just because the rent has not gone up for years does not mean it would have to go up at sometime in the future. I have dealt with hundreds of shops whose rents have remained unchanged for 10 years and more. Sometimes, there is scope for increase, but often the potential is limited by the terms of the tenancy.
And that brings me to another mistake: not realising the terms of the tenancy can affect the market rent.
The main reason mistakes happen is that investors assume and presume. They assume their knowledge of shops, retailers and leases is enough to go on. They may not presume what they're told is necessarily correct, but they assume the questions they ask are the questions to ask.
Investing in commercial property is not like residential property, and shop property is not like any other form of commercial property investment. Of all the mistakes investors make when buying a shop property investment, possibly the two biggest are:
1) to buy on initial yield, and
2) to buy on the strength on the tenant's covenant.
When you buy on yield, it is easy to compare the return on offer with the sort of returns available elsewhere, but that does not make for successful investment. (Buying yield is the bank talking!) Similarly, although tenant covenant makes sense in terms of the rent paid on time, you are likely to be paying a premium for that attraction, and that can be confused with value and might not be sustainable long-term.
Another classic mistake is misunderstanding "upward-only" rent reviews. Assuming the review is to market rent, and not some fixed formula, such as index-linking, what "upward-only" rent review actually means is that the passing rent payable after rent review will not be less than the rent payable before the review (assuming no adjustment for stepped-rents): it does not mean the rent must necessarily go up, simply it cannot go down.
Also, just because the rent has not gone up for years does not mean it would have to go up at sometime in the future. I have dealt with hundreds of shops whose rents have remained unchanged for 10 years and more. Sometimes, there is scope for increase, but often the potential is limited by the terms of the tenancy.
And that brings me to another mistake: not realising the terms of the tenancy can affect the market rent.
Investment
Investment is about being better off than you are
now. How much better off depends upon your personal
criteria, but how long it takes depends upon
whether your choice of investment is likely to
perform to expectations.
Although many investors like to compare the return with other forms of investment, such as cash on deposit, stocks and shares, shop investment performance is completely different from other types of investment. Partly, as I shall explain, it's the effect of non-standard leases, but mainly because, like all property, shop property is an illiquid asset, which means its value at any time cannot be readily converted into cash or some other liquid currency. Also, property is not a perfect market which means the value of each property depends either how much a buyer would pay, or on the opinion of a surveyor.
The market comprises buyers and sellers. Although surveyors do not make the market, it is the surveyor's interpretation of the behaviour and attitude of buyers and sellers that will have an often a profound influence upon the state and direction of the market. The reasons surveyors have so much say is that, unlike the buyer's opinion of value which is likely to be subjective and sentimental, the surveyor's opinion is objective. With 'subjective' the buyer will assess the proposition in relation to the buyer's individual requirements, whereas with 'objective' the surveyor will assess the proposition in relation to the market.
When investors are left to decide or fend for themselves, there is the risk that their assessment of the property's suitability as an investment is likely to include a host of subjective factors based on personal requirements as well as observations on the market. Although observing what others are doing at the time may provide some comfort, it is not until you know what is really happening behind-the-scenes that you can draw a reliable and balanced conclusion. Anything else is conjecture and speculation. In my experience, the main reason many private investors come unstuck is that they have failed to take account of the truth of the market.
The truth of the market is that commercial property is a depreciating asset. That's right: it goes down in value. Simply the costs and fees of selling and buying, stamp duty and so on, not to mention tax, can knock off thousand of pounds. The only way property can increase in value is when the rate of growth exceeds the rate of depreciation.
The rate of growth is a combination of rental and capital growth. Although capital growth is often rental dependent, it can be detached. Before the credit-crunch in 2007/2008, 'yield compression' created an illusion of growth. Yield compression is a gamble on interest rates. For example, a shop investment let at £20,000 a year and priced at £200,000 (yield 10%) when mortgage interest is 5% might be thought a bargain, so the price goes up to reflect the difference between the return and cost of borrowing. Nowadays, we have what I call 'confidence compression' where buyers are banking on capital growth as the gap narrows between the cost of borrowing and the investment yield.
Capital value is calculated by multiplying the estimated rental value by the yield (or year's purchase) that the market would require at the date of valuation. Note I said estimated, not actual. A shop let at £20,000 a year in 2005 might not fetch £20,000 a year in 2010 if offered to let on the market on precisely the same terms and conditions in the lease as in 2005. The estimated rent might be more, or it might be less.
The calculation is not formulaic: valuation is an art, not an exact science. Unlike stocks and shares where the market capitalisation of a company at any time can be analysed to the nth degree before buying or selling, each shop investment is unique: the building and layout may not be that dissimilar to other shops nearby, but the terms and conditions of the tenancy could differ, and the investor is not normally privy to the tenant's intentions for keeping or disposing of the premises.
Rental growth reflects from one or two factors, or a combination of both. Firstly, demand and supply of the sort of shops that suit the requirements of tenants in the market for premises at the time. Secondly, whether, in comparison with other premises and their tenancies, there is 'something' in the wording of the lease of the premises that would justify more rent. Anyone can read a lease, but knowing what to look for is what really counts. That 'something' is what lease analysis is about and why it is vital to have an in-depth understanding of business tenancy law and shop rental valuation. Generally, the investor does not have that much know-how which is why whether the potential for the investment has been reached, or still has a long way to go, often goes unrecognised.
Although a shop which is let is an investment, not all shop investments perform. Not all shop investments are capable of performing. Furthermore, many shop investments that have no chance whatsoever of performing are deliberately created by cunning sellers to attract naive buyers.
When you buy a shop property for investment, you are not buying into the tenant's business. How the tenant chooses to manage its business and pay the rent is nothing to do with you. You are buying the property and whether the investment is the entire building or part of a building, that is all. Sorting out the wheat from the chaff is the name of the game, and that is why long-term successful investment in shop property is not about yield, lease, or tenant, but the location.
Although many investors like to compare the return with other forms of investment, such as cash on deposit, stocks and shares, shop investment performance is completely different from other types of investment. Partly, as I shall explain, it's the effect of non-standard leases, but mainly because, like all property, shop property is an illiquid asset, which means its value at any time cannot be readily converted into cash or some other liquid currency. Also, property is not a perfect market which means the value of each property depends either how much a buyer would pay, or on the opinion of a surveyor.
The market comprises buyers and sellers. Although surveyors do not make the market, it is the surveyor's interpretation of the behaviour and attitude of buyers and sellers that will have an often a profound influence upon the state and direction of the market. The reasons surveyors have so much say is that, unlike the buyer's opinion of value which is likely to be subjective and sentimental, the surveyor's opinion is objective. With 'subjective' the buyer will assess the proposition in relation to the buyer's individual requirements, whereas with 'objective' the surveyor will assess the proposition in relation to the market.
When investors are left to decide or fend for themselves, there is the risk that their assessment of the property's suitability as an investment is likely to include a host of subjective factors based on personal requirements as well as observations on the market. Although observing what others are doing at the time may provide some comfort, it is not until you know what is really happening behind-the-scenes that you can draw a reliable and balanced conclusion. Anything else is conjecture and speculation. In my experience, the main reason many private investors come unstuck is that they have failed to take account of the truth of the market.
The truth of the market is that commercial property is a depreciating asset. That's right: it goes down in value. Simply the costs and fees of selling and buying, stamp duty and so on, not to mention tax, can knock off thousand of pounds. The only way property can increase in value is when the rate of growth exceeds the rate of depreciation.
The rate of growth is a combination of rental and capital growth. Although capital growth is often rental dependent, it can be detached. Before the credit-crunch in 2007/2008, 'yield compression' created an illusion of growth. Yield compression is a gamble on interest rates. For example, a shop investment let at £20,000 a year and priced at £200,000 (yield 10%) when mortgage interest is 5% might be thought a bargain, so the price goes up to reflect the difference between the return and cost of borrowing. Nowadays, we have what I call 'confidence compression' where buyers are banking on capital growth as the gap narrows between the cost of borrowing and the investment yield.
Capital value is calculated by multiplying the estimated rental value by the yield (or year's purchase) that the market would require at the date of valuation. Note I said estimated, not actual. A shop let at £20,000 a year in 2005 might not fetch £20,000 a year in 2010 if offered to let on the market on precisely the same terms and conditions in the lease as in 2005. The estimated rent might be more, or it might be less.
The calculation is not formulaic: valuation is an art, not an exact science. Unlike stocks and shares where the market capitalisation of a company at any time can be analysed to the nth degree before buying or selling, each shop investment is unique: the building and layout may not be that dissimilar to other shops nearby, but the terms and conditions of the tenancy could differ, and the investor is not normally privy to the tenant's intentions for keeping or disposing of the premises.
Rental growth reflects from one or two factors, or a combination of both. Firstly, demand and supply of the sort of shops that suit the requirements of tenants in the market for premises at the time. Secondly, whether, in comparison with other premises and their tenancies, there is 'something' in the wording of the lease of the premises that would justify more rent. Anyone can read a lease, but knowing what to look for is what really counts. That 'something' is what lease analysis is about and why it is vital to have an in-depth understanding of business tenancy law and shop rental valuation. Generally, the investor does not have that much know-how which is why whether the potential for the investment has been reached, or still has a long way to go, often goes unrecognised.
Although a shop which is let is an investment, not all shop investments perform. Not all shop investments are capable of performing. Furthermore, many shop investments that have no chance whatsoever of performing are deliberately created by cunning sellers to attract naive buyers.
When you buy a shop property for investment, you are not buying into the tenant's business. How the tenant chooses to manage its business and pay the rent is nothing to do with you. You are buying the property and whether the investment is the entire building or part of a building, that is all. Sorting out the wheat from the chaff is the name of the game, and that is why long-term successful investment in shop property is not about yield, lease, or tenant, but the location.
Shop Property Market
The market for shop property comprises investors,
developers and occupiers.
Unlike investors and occupiers, developers look at the potential for a existing property differently: they imagine what what the property could become. That potential might not be the property on its own, but also in conjunction with adjoining properties. Assembling a site from a number of different properties can result in a large development, whose end-value far exceeds the existing use value of the individual properties.
Investors tend not to think like that, but they should. Investment is about considering all the angles, one of which is whether the property has development potential.
Development potential is not limited to demolishing the building and building from scratch. It includes conversion, refurbishment, updating, improving and modernising the layout and configuration. It includes possibility for enhancing value by getting planning permission for change of use. For examples: a shop with a residential flat above where the flat could be converted into 2 or more flats; the shop combined with the shop next door to form a double unit for which there might be more demand, or demand from a different type of user and for which a higher rent pro-rata could be obtained; or a single-storey lock-up shop where it would be possible to construct another floor or more above. Even if you don't have the money to do the work yourself, that doesn't mean the development potential should be ignored.
Marketing is a function of business management and is a means to an end. Marketing happens when we want to satisfy a need and are willing to exchange something with someone able to help us satisfy that need. The process exists to bring buyers and sellers into a market. In business the transaction is reciprocal.
A market is anywhere business is done - it can be an actual place, such as an office, shop, auction room, or a virtual place such as the internet. Transactions are usually for money, but may involve bartering goods and services, and are conducted between sellers and buyers, or through agents, brokers, advisers, etc.
All markets have sectors and segments. In the property market, sectors comprise agriculture, land, residential, and commercial. The commercial property market comprises offices, shops, factories, warehouses, leisure and basically everything that involves some sort of business use and that does not fall into the other sectors.
The shop or retail property market comprises buildings in cities, towns and villages, retail parks, supermarkets, out-of-town shopping malls, and trade-counters. In the context of shop investment, the purpose for which the building was originally constructed may be immaterial, because what determines whether the property can be used for retail purpose is the town planning use.
Unlike investors and occupiers, developers look at the potential for a existing property differently: they imagine what what the property could become. That potential might not be the property on its own, but also in conjunction with adjoining properties. Assembling a site from a number of different properties can result in a large development, whose end-value far exceeds the existing use value of the individual properties.
Investors tend not to think like that, but they should. Investment is about considering all the angles, one of which is whether the property has development potential.
Development potential is not limited to demolishing the building and building from scratch. It includes conversion, refurbishment, updating, improving and modernising the layout and configuration. It includes possibility for enhancing value by getting planning permission for change of use. For examples: a shop with a residential flat above where the flat could be converted into 2 or more flats; the shop combined with the shop next door to form a double unit for which there might be more demand, or demand from a different type of user and for which a higher rent pro-rata could be obtained; or a single-storey lock-up shop where it would be possible to construct another floor or more above. Even if you don't have the money to do the work yourself, that doesn't mean the development potential should be ignored.
Marketing is a function of business management and is a means to an end. Marketing happens when we want to satisfy a need and are willing to exchange something with someone able to help us satisfy that need. The process exists to bring buyers and sellers into a market. In business the transaction is reciprocal.
A market is anywhere business is done - it can be an actual place, such as an office, shop, auction room, or a virtual place such as the internet. Transactions are usually for money, but may involve bartering goods and services, and are conducted between sellers and buyers, or through agents, brokers, advisers, etc.
All markets have sectors and segments. In the property market, sectors comprise agriculture, land, residential, and commercial. The commercial property market comprises offices, shops, factories, warehouses, leisure and basically everything that involves some sort of business use and that does not fall into the other sectors.
The shop or retail property market comprises buildings in cities, towns and villages, retail parks, supermarkets, out-of-town shopping malls, and trade-counters. In the context of shop investment, the purpose for which the building was originally constructed may be immaterial, because what determines whether the property can be used for retail purpose is the town planning use.
Legal framework
Property, in the context of buildings and land,
comes under the heading of 'real estate'. Real
estate is a legal term that encompasses land,
improvements to the land, such as buildings,
fences, wells and other site improvements that are
immovable and fixed in location.
The ownership of 'real property' in England and Wales is enshrined in common law, equity and statute. As a monarchy, ownership is based upon hierarchy. The 'Crown' has the right and duty to determine the legal owner of the land, and the duty is administered by Her Majesty's Land Registry, a government agency whose task is to keep title records. Property transactions are almost always in writing and the title deeds (records) include information about the owner, charges, restrictive covenants, and so on.
The ultimate title is the freehold, which is ownership for an indefinite period of time. Below the freeholder is the leaseholder. The leaseholder cannot grant an underlease lease for a longer period of time than the term of its own lease.
There is no practical distinction between landlord and owner, assuming the owner is also the landlord, or between tenants and occupiers, assuming the tenant is not the owner-occupier, but describing landlords as 'owners' and tenants as 'occupiers' reflects a desire amongst some to get away from feudalism. Similarly, it is open to discussion nowadays whether a landlord ought to be considered the more dominant, because many retailers regard landlords as their suppliers.
The shop property market comprises freehold and leasehold owner-occupiers, landlords and 'tenants'. (I've put 'tenants' because here I am using the term loosely to include licences. As I explain elsewhere, there are practical differences between tenancies and licences.). Where there are intermediate interests between freeholder and tenant, the in-between respective landlords would be defined as 'superior landlord' and landlord.
Frequently in leases, the landlord is described as 'lessor' or 'lessors' - the plural is sometimes used even though there may be only one party - and the tenant as 'lessee' or 'lessees'. Also, when the landlord is the officers of an administrative body, for example the "Mayor and Burgesses of..." the landlord could be described as the "council", and with railway leases, the landlord is often described as "the Board". Although for some aspects of a tenancy the correct description is necessary, for purpose of this section and unless otherwise stated, I shall stick to landlord and tenant.
The operation and enforcement of the legal relationship between landlord and tenant is subject to business tenancy law. Agricultural property law, which is in a field of its own (excuse the pun!) is, in some respects, arguably more progressive: for example tenant's improvements are not limited to physical alterations to the property, but include the intangible. Although residential property has its own law, there are some overlapping areas. For example, with a shop with a residential flat above and where the shop and flat are let on a business tenancy, the rental valuation of the flat is subject to business tenancy law.
Generally, a shop investment is a shop property that is let on a tenancy (or some other type of occupancy where rent or equivalent is paid). This may sound pedantic but, in my opinion, a vacant un-let property is not an investment until it is let. I think a distinction is useful because whilst a vacant shop would upon its letting be categorised as an investment, really there is no investment without a tenant.
The terms and conditions of a tenancy are embodied in a document, known as a 'lease'. Again, I use the terminology loosely, because the terms and conditions of a licence are also embodied in a document, but it would not be a lease. Moreover, calling such a document a licence does not make it one. I shall explain the difference elsewhere.
The relationship between landlord and tenant hinges upon the lease. A lease is a contract for a certain term and has a start date and expiry (end date). When a tenancy is for a business purpose, a lease is a commercial contract, and a commercial contract means the parties are in law deemed to know what they are doing.
I shall go into detail elsewhere but basically a lease contains terms and conditions for the operation, management and enforcement of the tenancy. The landlord and tenant, known as the parties, can agree whatever terms and conditions they like for the tenancy, but many requirements are governed by overriding legislation.
Because different landlords and different tenants have different requirements and shops, in common with all commercial properties, are different there is no standard form of lease in use generally. Whilst many landlords and tenants have their own standard wording and documentation - also the Law Society, for example, has a standard document used by landlords and tenants - you cannot buy a ready-made document and simply fill in the blanks and expect the tenant to sign without question, or at least not without changing some wording here and there. Normally, what happens is that after outline terms have been agreed between the parties and 'heads of terms' agreed, the lawyers for the respective parties, sometimes with the help of respective surveyors, draft and approve the documentation from scratch.
The onus is on the landlord's side to draft the document and on the tenant to approve. Because tenancies often last for years, and the wording of terms and conditions can be fashionable, the content of leases varies considerably. Also, although the terms and wording of a lease cannot be changed after completion, except by rectification or mutual agreement, leases are assets that can be bought, sold, transferred and mortgaged. During the life of a lease it is common for associated agreements to be entered into by the parties and/or their successors. Such agreements include deeds of variation, rent deposit deeds, licences to alter, change the use, assign, underlet, rent memoranda, and side-letters.
The ownership of 'real property' in England and Wales is enshrined in common law, equity and statute. As a monarchy, ownership is based upon hierarchy. The 'Crown' has the right and duty to determine the legal owner of the land, and the duty is administered by Her Majesty's Land Registry, a government agency whose task is to keep title records. Property transactions are almost always in writing and the title deeds (records) include information about the owner, charges, restrictive covenants, and so on.
The ultimate title is the freehold, which is ownership for an indefinite period of time. Below the freeholder is the leaseholder. The leaseholder cannot grant an underlease lease for a longer period of time than the term of its own lease.
There is no practical distinction between landlord and owner, assuming the owner is also the landlord, or between tenants and occupiers, assuming the tenant is not the owner-occupier, but describing landlords as 'owners' and tenants as 'occupiers' reflects a desire amongst some to get away from feudalism. Similarly, it is open to discussion nowadays whether a landlord ought to be considered the more dominant, because many retailers regard landlords as their suppliers.
The shop property market comprises freehold and leasehold owner-occupiers, landlords and 'tenants'. (I've put 'tenants' because here I am using the term loosely to include licences. As I explain elsewhere, there are practical differences between tenancies and licences.). Where there are intermediate interests between freeholder and tenant, the in-between respective landlords would be defined as 'superior landlord' and landlord.
Frequently in leases, the landlord is described as 'lessor' or 'lessors' - the plural is sometimes used even though there may be only one party - and the tenant as 'lessee' or 'lessees'. Also, when the landlord is the officers of an administrative body, for example the "Mayor and Burgesses of..." the landlord could be described as the "council", and with railway leases, the landlord is often described as "the Board". Although for some aspects of a tenancy the correct description is necessary, for purpose of this section and unless otherwise stated, I shall stick to landlord and tenant.
The operation and enforcement of the legal relationship between landlord and tenant is subject to business tenancy law. Agricultural property law, which is in a field of its own (excuse the pun!) is, in some respects, arguably more progressive: for example tenant's improvements are not limited to physical alterations to the property, but include the intangible. Although residential property has its own law, there are some overlapping areas. For example, with a shop with a residential flat above and where the shop and flat are let on a business tenancy, the rental valuation of the flat is subject to business tenancy law.
Generally, a shop investment is a shop property that is let on a tenancy (or some other type of occupancy where rent or equivalent is paid). This may sound pedantic but, in my opinion, a vacant un-let property is not an investment until it is let. I think a distinction is useful because whilst a vacant shop would upon its letting be categorised as an investment, really there is no investment without a tenant.
The terms and conditions of a tenancy are embodied in a document, known as a 'lease'. Again, I use the terminology loosely, because the terms and conditions of a licence are also embodied in a document, but it would not be a lease. Moreover, calling such a document a licence does not make it one. I shall explain the difference elsewhere.
The relationship between landlord and tenant hinges upon the lease. A lease is a contract for a certain term and has a start date and expiry (end date). When a tenancy is for a business purpose, a lease is a commercial contract, and a commercial contract means the parties are in law deemed to know what they are doing.
I shall go into detail elsewhere but basically a lease contains terms and conditions for the operation, management and enforcement of the tenancy. The landlord and tenant, known as the parties, can agree whatever terms and conditions they like for the tenancy, but many requirements are governed by overriding legislation.
Because different landlords and different tenants have different requirements and shops, in common with all commercial properties, are different there is no standard form of lease in use generally. Whilst many landlords and tenants have their own standard wording and documentation - also the Law Society, for example, has a standard document used by landlords and tenants - you cannot buy a ready-made document and simply fill in the blanks and expect the tenant to sign without question, or at least not without changing some wording here and there. Normally, what happens is that after outline terms have been agreed between the parties and 'heads of terms' agreed, the lawyers for the respective parties, sometimes with the help of respective surveyors, draft and approve the documentation from scratch.
The onus is on the landlord's side to draft the document and on the tenant to approve. Because tenancies often last for years, and the wording of terms and conditions can be fashionable, the content of leases varies considerably. Also, although the terms and wording of a lease cannot be changed after completion, except by rectification or mutual agreement, leases are assets that can be bought, sold, transferred and mortgaged. During the life of a lease it is common for associated agreements to be entered into by the parties and/or their successors. Such agreements include deeds of variation, rent deposit deeds, licences to alter, change the use, assign, underlet, rent memoranda, and side-letters.
Town Planning permission
Whether a property can be used as a shop, office,
factory, warehouse, or for any other type of
business depends on the town planning
permission.
Since 1948, planning permission has been required for all new development. Town planning is a function of Central and Local Government and is a democratic process. The person wanting permission makes an application to the appropriate planning authority, the application is publicised, and interested parties notified and objections invited during the consultation period. The planning officer makes a recommendation to the planning committee which decides whether to grant the permission. Having obtained permission, the applicant does not have to implement the permission, but the life of a permission normally expires after 3 years. If the application is refused then the applicant can make an appeal, in which case the matter would be considered by the Planning Inspectorate for England and Wales which is an executive agency of the Department for Communities and Local Government, under the auspices of the Secretary of State. If you would like to read more about development control, Wikipedia has some useful information: link.
A planning permission attaches to the property and does not belong to the applicant personally, although the applicant may be the only person able to comply with any conditions attached, or to implement the permission. Anyone can make a planning application and they do not have to be the legal owner of the property.
Certain types of development are excluded from the definition of development, such as routine building maintenance and repair. Many categories of minor development are classified by law as permitted development and that grants an automatic planning permission, rather than requiring any specific application.
As well as planning permission obtained or on appeal, the actual use of the property may be established use. An established use is a use that has been in continuing existence for a long period of time (at least 4 years and up 10 years depending upon the use) and the right to obtain a "certificate of lawfulness of existing use or development" is not something the planning authority can oppose, but the applicant must be able to prove conclusively the established use.
In England and Wales, the legislation governing planning use is the Town and Country Planning (Use Classes) (Order 1987. Applicable in England only is Town and Country Planning (Use Classes) (Amendment) (England( (Order 2005) which redefined Use Class A3 as A3, A4 and A5. Some uses are considered to be sui generis, which means they are outside the existing uses classes.
The default Use Class for shop property is A1, but the type of business carried out by the occupant at the premises will determine the required use for planning purposes. For example, banks, financial services, and betting offices are Class A2 users, restaurants, cafes, take-away hot food come under Classes A3 and A5.
County Councils will have some sort of Core Strategy Plan which is updated every 10 years or so. For each town in the county, the shopping areas are defined and there may be a quota of permitted uses. Generally, planning authorities oppose the loss of local shopping facilities (A1 users), even though there there might be more demand from other use class businesses. So, because planning permission for some uses can be more difficult or impossible to obtain, the existence of or potential for that use can enhance the value of the property. Also, and I shall discuss this later, the permitted use in the lease might include uses which would justify a greater rent, even though the tenant might not want to use the property for that particular use.
Since 1948, planning permission has been required for all new development. Town planning is a function of Central and Local Government and is a democratic process. The person wanting permission makes an application to the appropriate planning authority, the application is publicised, and interested parties notified and objections invited during the consultation period. The planning officer makes a recommendation to the planning committee which decides whether to grant the permission. Having obtained permission, the applicant does not have to implement the permission, but the life of a permission normally expires after 3 years. If the application is refused then the applicant can make an appeal, in which case the matter would be considered by the Planning Inspectorate for England and Wales which is an executive agency of the Department for Communities and Local Government, under the auspices of the Secretary of State. If you would like to read more about development control, Wikipedia has some useful information: link.
A planning permission attaches to the property and does not belong to the applicant personally, although the applicant may be the only person able to comply with any conditions attached, or to implement the permission. Anyone can make a planning application and they do not have to be the legal owner of the property.
Certain types of development are excluded from the definition of development, such as routine building maintenance and repair. Many categories of minor development are classified by law as permitted development and that grants an automatic planning permission, rather than requiring any specific application.
As well as planning permission obtained or on appeal, the actual use of the property may be established use. An established use is a use that has been in continuing existence for a long period of time (at least 4 years and up 10 years depending upon the use) and the right to obtain a "certificate of lawfulness of existing use or development" is not something the planning authority can oppose, but the applicant must be able to prove conclusively the established use.
In England and Wales, the legislation governing planning use is the Town and Country Planning (Use Classes) (Order 1987. Applicable in England only is Town and Country Planning (Use Classes) (Amendment) (England( (Order 2005) which redefined Use Class A3 as A3, A4 and A5. Some uses are considered to be sui generis, which means they are outside the existing uses classes.
The default Use Class for shop property is A1, but the type of business carried out by the occupant at the premises will determine the required use for planning purposes. For example, banks, financial services, and betting offices are Class A2 users, restaurants, cafes, take-away hot food come under Classes A3 and A5.
County Councils will have some sort of Core Strategy Plan which is updated every 10 years or so. For each town in the county, the shopping areas are defined and there may be a quota of permitted uses. Generally, planning authorities oppose the loss of local shopping facilities (A1 users), even though there there might be more demand from other use class businesses. So, because planning permission for some uses can be more difficult or impossible to obtain, the existence of or potential for that use can enhance the value of the property. Also, and I shall discuss this later, the permitted use in the lease might include uses which would justify a greater rent, even though the tenant might not want to use the property for that particular use.