Universities are increasingly commercialising their operations, and this includes, to a large degree, their property assets, both to enhance the student experience and to generate revenue. The shift in power dynamic towards the student, and the increasing demand for outstanding buildings and facilities, means that it is not uncommon to find a wide variety of retail and dining options on campuses, as well as other commercial service offerings, such as ATMs, banks, kiosks and shops.
So what are the key considerations and pitfalls when universities become commercial landlords?
Good systems and processes. These should form the foundation of the entire commercially let portfolio. Are your systems set up in the right way to deal with commercial lettings? Do you know where the risks lie and is there someone central managing them? Any institution needs to establish good practices to manage the wide variety of issues that need dealing with, from consideration of the initial commercial terms, through to the legal documentation effecting each letting, ongoing management issues during the life of the lease, and end of term liabilities and considerations.
Commercial heads of terms. There are some fundamental commercial issues that need addressing at the heads of terms stage and these, in turn, need to be accurately contained within the drafting of the legal documentation. These can include:
- Are you getting best value, in terms of revenue? If a tenant is likely to be particularly profitable, due to its location on campus, should a share of profits be sought, for example?
- What controls do you need over the property and the trade carried on there? Do you need the premises to be open at unusual times, or even 24/7, for the benefit of the student experience? Do the premises need to be closed at certain times, for example during exams? Dealing with universities can be a learning curve for private sector businesses as well, as universities’ needs and drivers are different.
- Are there broader university considerations that need to be taken into account, for example other legal or funding agreements, that impact on the proposed letting?
- Have you checked the financial, and reputational, calibre of the tenant?
Standardised lease and other legal documentation to protect the university’s interests. Universities are well advised to have standardised lease documentation to smooth the negotiation process and to ease management of the portfolio, which can easily become unruly, if a variety of leases and other documentation is used. Some key considerations should include:
- Term end dates and/or break clauses need to align with the university’s overall estates strategy. You need to ensure vacant possession can be gained when it is needed to avoid undesirable ransom situations.
- Clarity around repairing obligations – who is responsible for what?
- Requirements of, and restrictions on, the tenant. What restraints and controls do you need around carrying out alterations, or permitting assignments and underlettings (if permitted at all)? Be alert to changes of control of your tenant and be sure appropriate protections have been built into the lease.
Landlord and Tenant Act 1954 and security of tenure. This is a technical and complex area of law, but, in a nutshell, this Act gives business tenants security of tenure and this is a significant risk to university property assets, as a tenant with “1954 Act protection” cannot be required to vacate at the end of their lease, rather they are entitled to a new lease of their premises (subject to certain exceptions). However, the Act allows tenants to agree to waive this security of tenure (subject to following a strict legal process) and consideration should therefore be given to making this a standard commercial requirement for any letting of university premises. Care needs to be taken, however, and those involved in the management of the portfolio need to appreciate the risks to the Institution and take specialist legal advice accordingly.
- The risks of allowing occupation on an undocumented basis. It can happen that third parties are allowed to occupy university premises without any lease or licence being in place, for example, by:
- Allowing a tenant to remain in occupation after a fixed lease term has expired
- Allowing a third party casual “temporary” occupation of premises, for example additional office or lab space
This can be difficult to control in practice as, very often, these arrangements will be entered into by staff “on the ground” for reasons of expediency. However, it is important to control such arrangements, as not only does the university effectively lose control of the premises, but, of even more concern, is the fact that the occupier may well be able to claim the security of tenure offered by the Landlord and Tenant Act 1954. It is worth carrying out an audit of the university’s premises to establish whether casual, undocumented, occupancies exist. These may have existed for many years. If they do, proactive steps should be considered to regulate the position.
Services and service charges – the commercial lease will almost certainly provide for the university, as landlord, to provide certain services and for its tenants to pay for these by way of service charge. In practice however, calculating and collecting service charge can prove tricky for universities, which are not set up to do this in the same way private sector, commercial landlords are. There are, however, practical, work around, solutions to deal with this. These need to be agreed upon and built into the lease, so as to ensure that the university does not miss out on service charge collection.
From the legal perspective, at the core of managing any let portfolio is the need for both control and an appreciation of the background risks, to smooth day to day management, maximise revenue and facilitate delivery of future strategies and projects for the university estate.