Childcare: the importance of understanding security of tenure

As part of our day to day roles as childcare specialists, we provide advice to owners regarding both acquisition plans and exit strategies.  A major part of this advice relates to the security of tenure of the building in which a particular setting or settings may be trading from. Tenure or terms of occupation will have a material impact on both the desirability of that business to a buyer, and the value of the business or price that a buyer would be willing to pay.

The D1 planning classification as required in order to operate a property for day nursery use means that we see businesses trading from a very wide variety of different premises, including church halls, scouts halls, converted offices, former residential buildings, modular buildings and purpose built settings, all of which may well have different occupancy or tenure agreements, that may or may not offer security of tenure.

When reviewing the security of tenure associated to the occupation rights associated to a business, security is the key word. Prospective buyers of you business will be keen to ensure that their occupation of the property has the right protection, and will award them enough time to see their investment grow and then when the time is right for them to sell, the prevailing tenure will provide a new owner with similar security.

In terms of different types of tenures, there are many. These include freehold, virtual freehold, peppercorn ground rents, long leases, short leases, licences, occupational agreements and rolling yearly, quarterly or indeed monthly agreements.

Different tenures award different terms of timescales and protection. Some owners initially only take short term leases, as they feel that if the business does not go to plan they can extract themselves from any long term rental commitment. Also opportunities on school sites, in church halls and council owned properties invariably have limited security of tenure.

A key point to consider is that if the tenant has the option of automatic right of renewal, this would mean that their lease is within the Landlord and Tenant Act 1954. This Act was introduced as a measure to govern the rights and obligations of landlords and tenants of premises which are occupied for business purposes. Being ‘within the 54 Act’ means that when the agreed term of their lease comes to an end, they have the right to remain in occupation at the end of the contractual term and the right to apply to the court for the grant of a new lease. All leases are automatically within the 54 Act unless both parties agree to be contracted out of the security of tenure provisions, meaning that, at the end of the lease term, they could have to vacate the property, and return it to the landlord in the condition in which it was let to them. This can bear a cost to the tenant, not only in business and reputational terms but also in property terms associated to costs surrounding dilapidations – a sizeable and costly topic which we’ll save for another article.

In a market where D1 spaces are so hard to come by, this could be devastating to a business if they cannot find alternative premises within an appropriate and close locality, so being prepared for such eventualities ahead of time is very important. Therefore, being within this Act provides all owners with a further degree of comfort and is something many buyers look for.

The more protection a vendor has with their tenure, the greater the value associated with their business is, save for all other lease terms being reasonable and commercial, and toxic terms or rental commitments are not viewed to be evident or viewed to be onerous. By way of example, a rolling one year licence agreement which provides the landlord with a rolling monthly break clause option will not be as attractive as a 20 year lease, drawn on terms favourable to the tenant, which provides the tenant with a right to renew, with a passing rent which is viewed to be below, or at market rent.

Each and every business can have a different twist on their tenure and just because your current tenure may not be the most attractive, if you were selling there may be the option to negotiate with your landlord. Whether you are buying or selling, tenure will undoubtedly play a factor in your decision going forward and taking the right advice is an important part of any process.