Core Services

• strategic vision
• strategic property analysis
• relocation management
• relocation review
• property audits
• exit strategies
• space reduction

The Midas Touch

Leader

Happy New Year!

Welcome to this issue of "The Midas Touch", the quarterly newsletter of Midas Corporate Consulting, the market-leading business property consultancy.

2007 is already starting well. We occupy a rare position in the property services market as we have in-depth experience of working with business occupiers. This gives us an unrivalled insight and know-how into achieving business solutions in property areas that can benefit the occupier and landlord if the relationship is managed correctly.

This issue illustrates our approach to continuously raise awareness of best practice and standards amongst both occupiers and landlords. One of our main features is the role that service charges play in modern commercial property agreements.

We also look at the circumstances when break clauses can be used as effective exit strategies, and consider the risks of sale and leasebacks as a way of seeking to take advantage of the buoyant investment market.

Finally, thank you to all those people who sent in really useful feedback after the last issue. Please feel free to contact Midas with your further suggestions, comments or questions. And, if you like what you read here, then please let us know of any colleagues or business associates whom you think would find our newsletter valuable.

Best regards,

Andrew Pegg
Managing Director

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Competition

Your chance to win a bottle of champagne!

If you can answer the following three questions correctly, you stand the chance to win a bottle of bubbly from Midas.
1. In which country or countries does Mount Everest stand?
2. What do the five interlocking rings of the Olympics' symbol represent?
3. What new Building Regulations on ventilation and conservation of fuel and power will impact business occupiers?

Send your answers by email to contact Midas no later than Friday 16 February 2007. All correct answers will be put in a hat. The winner and the correct answers will be published in the next issue of The Midas Touch.

News

The London Chamber of Commerce and Industry has warned of a potential commercial exodus from London because of rising costs of office space and factory units throughout the London region.

According to its survey of more than 150 companies in the capital, up to four out of 10 (38%) firms would consider quitting London because of the increasingly high price of keeping a base in the city. Of those weighing up relocation, nearly a quarter are thinking of moving in the next year, while nine out of 10 would consider a move within five years.

The survey found that business rates were chiefly to blame for rising costs, with rental levels closely behind. Eighty per cent of directors from the 158 companies who were interviewed said that business rates were a very or fairly significant factor for their companies, over and above other concerns such as insurance, rents, utility prices and planning issues.

There are often avenues to appeal or reduce rates' liabilities. If you would like to find out whether you can reduce your rates' liability, please contact contact Midas.

For more information, please contact Midas.

As reported in the last issue, Midas has formed a "coalition" with like-minded business property professionals to provide a pool of specialist knowledge and services to clients, whether large or small.

The coalition is proposing a review of the status of corporate property asset management within organisations in conjunction with the Royal Institution of Chartered Surveyors (RICS). This review would help promote latest best practice, including an analysis of the different disciplines involved in property management which are distinct to the skill sets of commercial landlords and agents.

Andrew Pegg of Midas Corporate Consulting has been a key mover in coordinating this initiative and explains that the review would provide a follow up to the debate created by the report called 'Property in Business - a waste of space?', commissioned in 2002 by the Royal Institution of Chartered Surveyors. Prepared by the respected independent economist, Roger Bootle, the report revealed that businesses in the UK are throwing away £18 billion a year through inefficient use of their property assets.

"I strongly believe that companies can enhance their commercial performance and boost profits considerably by understanding their property options set against the needs of the business. This can involve looking at their strategy, surplus space within buildings, service charges or challenging over-inflated rates bills to name a few," Andrew told The Midas Touch. "We must not only raise awareness of what is possible with commercial property but also give businesses the tools and techniques to start challenging these issues themselves."

For more information on the Bootle report, click here.

New fire safety rules came into force on 1st October 2006 across the country which oblige the person in control of commercial and industrial premises to undertake Fire Risk Assessments of their property and ensure that steps are taken to minimise any fire risk. It is worth noting that the obligation applies to business occupiers where they are in control of the building or part of it.

The reforms aim to improve fire safety by making it the responsibility of the employer or 'responsible person', who will be required to assess the risks of fire and take steps to reduce or remove them. Under the new rules, businesses will no longer need a fire certificate, although fire authorities will continue to inspect premises and ensure adequate fire precautions are in place. The fire authority can prohibit the use of part or all of a building if it believes that it presents a significant danger to the occupants.

If you would like assistance with preparing a Fire Risk Assessment, please contact Midas.

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Meet the team

Managing Director - Andrew Pegg
Director of Business Analysis - Chido Ikeyina
Director of Strategic Consulting - Julian Capell
Team PA - Wendy Slane

To contact any of the Midas team, please click on their names above.

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Wendy Slane is in charge of the administration at Midas Corporate Consulting. She recently turned 40 and was given a dream-come-true birthday present. Ever since the age of nine, Wendy has wanted to go to Mount Everest, the highest mountain in the world.

Wendy and her partner Paul flew to Shanghai, China from where they travelled to Tibet. They hired a jeep and driver and travelled off-road through Tibet for 5 days. When they reached Rongbruk monastery in Everest National Park, they walked nearly 9 km to get to the Everest first base camp.

Everest can be shrouded in clouds for many weeks but Wendy was lucky enough to see her first sights of the 8848m-high mountain framed in a brilliant blue sky. "We had clear views of the snow being swept off the peak by the wind. It was the most incredible thing I have ever seen," Wendy told The Midas Touch.

Wendy's ambitions for 2007? "I'll settle for the French Alps this year, and perhaps prepare for a more ambitious trip trekking in Tibet in 2008."

Best practice

Service Charges in Commercial Property

Service charges have an important impact on property costs, particularly in London where they can be £8-£10 per square foot on top of the rent and rates. Poorly managed service charges are a frequent cause of dispute between business owners and occupiers.

Service charges are often charged in addition to rent as a way of sharing the costs of common services in properties occupied by more than one occupier. These can include for example repairs of the exterior and structure of the building, cleaning of the common parts, lighting, security, landscaping, toilet facilities, etc. Business occupiers should always establish what services will be provided, how the service charge figure has been arrived at in terms of the percentage of total costs, and figures for the last 3 years' of service charges should be made available, including any estimates for additional large costs envisaged for the future such as roof repairs.

If an occupier wants to move into premises which have outstanding repairs, the occupier may want to negotiate a cap on their service charge contribution and should be able to request updates on progress to repairs. However such arrangements require careful consideration on both sides.

Best practice

Best practice requires service charges to be procured on a value for money basis and competitive quotations should be obtained for the supply of these services. The costs of these services must be transparent so that all parties are aware of how the costs are made up, including management fees and no hidden mark ups.

The manager who administers the services should prepare regular budgets to occupiers with an explanatory commentary at least one month before the start of the service charge year and reconciliations following the year end within four months of the year end. Prompt notification of unforeseen variances must be notified as soon as possible.

Service charges should be apportioned using standard methods (you can check with Midas on these), and should be fair and reasonable.

RICS new Code of Practice

The current trend in commercial property towards shorter term leases has led to more frequent lease renewals. RICS views this trend as an opportunity to integrate modern, best practice standards on service charges into the commercial property sector. It has prepared a comprehensive Code of Practice for service charges in commercial property which comes into force as from 1 April 2007. The aim of the code is to ensure that all users of property can operate transparently, and best practice will include full alternative dispute resolution provisions to the benefit of both landlords and occupiers.

If you have a review of your service charges coming up, Midas can look at this to ensure you are getting the best deal in line with best practice.

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Case Study

Exit strategies - break clauses

Our case studies illustrate how Midas works with clients to unlock the potential in their property portfolios. Many businesses in the UK occupy premises on fixed term leases. As their business evolves, their property requirements may change. This case study looks at the importance of devising exit strategies, and in this particular case, options for using break clauses.

Break clauses allow for the occupier (and sometimes the landlord) to break the lease at a specified time. Many break clauses have two pre-conditions; first of all, that there needs to be proper service of a break notice, and secondly that the business occupier has complied or complied with the terms of the break to be effective before the break date.

Adequate compliance with the occupier's obligations under the lease can often become a point of contention with a landlord. Although it is usually not a problem for an occupier to establish for example that rent, insurance and service charges have been paid, the obligation to repair is the area where there is often most dispute.

An important Court of Appeal case in 2006 illustrates that there is some flexibility on this issue and that the law does take into account the individual facts of each case. In this case, the Financial Times was renting property from its landlord Fitzroy House Epworth Street Ltd. The lease allowed for a break clause in the business tenancy provided the Financial Times had "materially complied" with their obligations under the lease by the break date. In fact, the Financial Times spent over £1 million in undertaking repair works to the premises. However, the landlord argued that it had found £20,000 worth of incomplete repair works which meant that the occupier had not "materially complied" with its obligations.

Both the court at first instance and the Court of Appeal found in favour of the occupier, the Financial Times. The Court of Appeal explained that the use of the word "material" in the break clause was to mitigate a requirement that the occupier comply absolutely with all of its covenants by the break date.

If you are looking to break a lease, this should be initiated in good time. You should seek advice from Midas as early as possible in relation to repairing obligations. Failure to break a lease can obviously leave the occupier on the hook for substantial unwanted liabilities for many years.

Please note that the 1995 RICS Code of Practice for Commercial Leases is currently under review. We will cover any recommendations affecting break clauses in a future issue of The Midas Touch.

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Viewpoint

Location, Location, Relocation?

The old adage about what makes a great retail commercial property still chimes true: location, location, location. Indeed company directors have a duty of care to choose the appropriate location for their business and its people.

The location of a business premise throws up many issues to consider, such as transport and access. It should also include staff safety and security issues. In the US, company directors have been taken to court recently for locating their staff in an area which was evidently unsafe. So when you are looking at location and relocation, you need to consider staff safety too.

Ask Midas

In this section, we address some of typical questions we receive from our clients and from the press.

Sale and leasebacks

Q. What are sale and leasebacks?
A. Sale and leasebacks present a financing option for companies to realise capital for the business from their long leasehold properties. Sale and leasebacks provide the business with an immediate cash injection which can be used to pay off debt or be reinvested to get a greater return than the cost of capital within the business.

Q. What are the risks involved?
A. Unless the transaction is carefully considered the business could be left incurring higher, long-term costs and business interruption risks that far outweigh the benefit of the initial injection, particularly if the site has a higher underlying value than the current use. Similarly, if the contract has to provide for fixed rent increases to create growth in the investment, the occupier could be left with a property which is over rented and unlettable on the market.

Q. What alternatives exist?
A. Consider using traditional financing options while using property on security or lease and buy back option. The key is not to give away control of the real value.

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Latest Midas publications

• Property: asset or liability? Andrew Pegg, Business Money, October 2006
Having a hand in property, interview with Andrew Pegg, Estates Review, January 2007
• The Property ChallengeAndrew Pegg, Facilities Management Journal, July 2006

Call for interest

Following the successful event organised by Midas and the Cass Business School in October 2006 on the role of property management in business improvement, we are now consulting clients on future topics on which they would like to hear debate. Anyone who would like to present their viewpoint at one of the Midas events should contact contact Midas with details of the subject matter and their availability.

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