Rateable value vs Rent

[Undercover Agent]

Afternoon chaps and chapettes!

A friend of mine is looking to rent a shop for a few years, and one has finally come up in a very prominent position in town that he's going to look at tomorrow. (Melbourne, Derbyshire)
Now, the shop itself is quite small (36 SqM) and has a 3 bedroom, 2 storey flat/maisonette above it.
The landlord has it advertised as the shop+flat at circa £1670p/m (seems a lot), but my friend only wants the shop.

The agent has said that the landlord will consider splitting it (the flat already has separate access)
But there has been no discussion as yet on the price when split as yet.

So... on to the numbers.
The valuations office shows the most recent (2017) rateable value for the SHOP at £6500.

Would it be fair to offer the rateable value as an offer for rent p/a?

I ask this because at £6500 p/a, that's £541 p/m, meaning the flat would need to fetch about £1100 p/m, which is WAY above what appears to be the going rate in the area, you can get a 3 bed house for well under £1k.


Thoughts / Advice?



The property in question:
https://www.rightmove.co.uk/commercial-property-to...

[Keep it stiff]

The existing RV is based on the hypothetical value at April 2015. Almost certainly the residential flat will not be part of the RV. If you go on the VO website you should be able to find the listing and from the measure it will be clear if the upstairs is part of the value or not. (Sometimes a "flat" might be a "stockroom" for the VO.) Whilst in the perfect world the RV and the market rent might be very similar you are more likely to find a difference between the two, either way, and hence I would not be a good idea to use RV as your benchmark. Note too that retail RVs work in bands, a wide unit will have a higher RV than a long unit. I suggest you look for other retail units, either on the market now or previously, convert headline rent into rent per ft2 and hence get a better understanding of where figures are. If you make an offer the fact that you have done your homework should strengthen your negotiating position. Be mindful too that a landlord wants a tenant in whom he can have confidence, be prepared to explain how the unit will be used/business plan if you make an offer. There are some hungry landlords' out there so don't be afraid to be bold.

[surveyor]

Keep it stiff said:

The existing RV is based on the hypothetical value at April 2015. Almost certainly the residential flat will not be part of the RV. If you go on the VO website you should be able to find the listing and from the measure it will be clear if the upstairs is part of the value or not. (Sometimes a "flat" might be a "stockroom" for the VO.) Whilst in the perfect world the RV and the market rent might be very similar you are more likely to find a difference between the two, either way, and hence I would not be a good idea to use RV as your benchmark. Note too that retail RVs work in bands, a wide unit will have a higher RV than a long unit. I suggest you look for other retail units, either on the market now or previously, convert headline rent into rent per ft2 and hence get a better understanding of where figures are. If you make an offer the fact that you have done your homework should strengthen your negotiating position. Be mindful too that a landlord wants a tenant in whom he can have confidence, be prepared to explain how the unit will be used/business plan if you make an offer. There are some hungry landlords' out there so don't be afraid to be bold.

+1

[User name]

Thanks - My friend's got me involved as I've rented a shop in the town too, a while back.
(Just to confirm I am aware the RV stated is for the shop only)

I nipped round and had a look through the window this afternoon, its going to need completely gutting, re-plastering, new flooring etc to make it a usable unit for his needs, as the previous tenants haven't cleared out all their fittings, but have taken out the air-con, leaving a massive hole in the hung-ceiling.
So there's definitely potential for a decent length rent-free period.

I think the best idea is to go and see it together tomorrow, and ask what they want.
A bit like buying cars, don't show emotion, point out all the flaws... start low.

I have an idea where we should start the negotiations at.

Edited by User name on Thursday 16th August 19:24

[User name]

Well they've just thrown £12k p/a at us.

Nah.

Edited by User name on Friday 17th August 15:09

[Chrisgr31]

Shops are usually valued on a zoned basis, so the first 20ft of depth is at 100% the next 20ft at 50% etc those floor areas are available on the VO website. You can then compare unequal shaped and size shops with each other. So the easy thing to do is to divide the VO valuation by the zone A rate he has adopted to get the area in terms of zone A. Then speak to other retailers in the area to find out the rent they are paying assuming its for a shop only. You can work out their area in the same way and therefore decide if the rate per square metre you are being offered is correct. Only issue being many tenants think they have a good deal and it should be secret. Usually turns out they arent getting a good deal!

Its not a surprise to find the rent is well above the RV it often is.

[singlecoil]

If 12K PA is too much then it suggests that the prospective tenant is unsure of the success of the business. Thing is, if he's unsure at 12K then he is going to be unsure at 6K or even less than that.

This is no time to be getting in to High St retail if you are not certain of success, and even if you are certain it's probably still not a good time.

[Undercover Agent]

singlecoil said:

If 12K PA is too much then it suggests that the prospective tenant is unsure of the success of the business. Thing is, if he's unsure at 12K then he is going to be unsure at 6K or even less than that.

This is no time to be getting in to High St retail if you are not certain of success, and even if you are certain it's probably still not a good time.

That makes no sense at all - My friend wants to pay the least rent possible of course, getting good value has absolutely nothing to do with the viability of the business. Minimising overheads is a solid basic principal of business.

[singlecoil]

Undercover Agent said:

singlecoil said:

If 12K PA is too much then it suggests that the prospective tenant is unsure of the success of the business. Thing is, if he's unsure at 12K then he is going to be unsure at 6K or even less than that.

This is no time to be getting in to High St retail if you are not certain of success, and even if you are certain it's probably still not a good time.

That makes no sense at all - My friend wants to pay the least rent possible of course, getting good value has absolutely nothing to do with the viability of the business. Minimising overheads is a solid basic principle of business.

Au contraire, it makes perfect sense, but perhaps I need to enlarge on it-

You've already said 12K is too much, and have implied that your friend will not be gong ahead at that rent. Therefore there is no business to assess the viability of. Your reply would make sense if we were discussing insurance, burglar alarms or any of the other costs a business has to meet.

But perhaps there are other premises in the same areas available? In which case that is a red flag anyway, nobody willingly shops in an area where there are a number of empty shops.

When you consider all the costs of running a retail business, wages if staffed, opportunity cost if not, then the difference between the £6.5K you were happy with and the 12K (£105 per week) you are not happy with isn't enough to base the decision on alone, bearing in mind that if you don't take it then there is no business.

I realise you can't share all the factors on a public forum, I'm just going by what you have said so far.

[Undercover Agent]

We are going to have to agree to disagree here: for a small startup business £6k P/A makes a HUGE difference. I cant share the exact details bit it's catering/hospitality.

Also I'll add that my point was that we feel £12k is too much for the premises as-is, We have seen it - not that he can't afford it, it's the make-or-break of the business starting. It just needs negotiation.

[singlecoil]

I'm ok with agreeing to disagree, although it leaves me wondering what the projected turnover/profitability of the business is that 6K makes a HUGE difference.

I understand all about negotiating and I can now see that your comment earlier was not meant to indicate that you would not be going ahead.

Edited by singlecoil on Monday 20th August 15:39

[Johnniem]

OP, bear in mind that the landlord may well have received money from the outgoing tenant to deal with the removal of the fit out that he has not removed before he left (unless the previous tenant went bust. In which case, see above re high street retail usage!). If that is the case then the landlord may well be happy to negotiate further. Also, your bottom line must be to recover the costs of removal of the previous tenants fixtures and fittings and full repair and redecoration to put it into good tenantable repair. If he does not agree to this then make sure that you agree a schedule of condition before you sign the lease (have it appended to the lease and make sure the repair, redecoration and yield up clauses refer to it!). If you do not do this then the landlord will expect you to give it back to him at the end of your friends lease in a 'good and substantial repair and condition'. This means that if it is in bad repair at the moment, the law will expect you to put it into good repair so that you can keep it in good repair. Mad but true.

Finally, make sure he reads the lease before he signs it! Every clause. If he doesn't understand it, ask the lawyer!

JM