Surplus Lease Mitigation

Providing for Surplus Leases

The financial treatment of surplus leases has long been an area where companies have been caught short, often with inadequate and in some cases, no provision for surplus leasehold liabilities. For SME’s and larger corporates alike, there is a strong temptation to prioritise core business activities and not divert resource to the task of evaluating and reporting realistic NPV costs for surplus leases or driving asset management mitigation strategies. However, without proactive management, there is likely to be a masking of both the true financial cost to a business and the visibility of such liabilities in financial statements.

What Action Should Your Organisation Be Taking?

Data Capture – a robust capture of all relevant lease features, operating costs, sub-lease data and realistic assumptions on market conditions, exit strategy and cashflow impact will be an essential starting point.

Dilapidations Liability – repairing obligations are commonly overlooked in surplus properties but can often have a disproportionate effect on the level of provisions and the prospects of achieving a sub-let. Section 18 valuation assessments should also feature as a potential risk mitigation tool.

Financial Modelling – NPV modelling should be adopted to generate realistic provisions with explicit assumptions which should be reviewed quarterly and adjusted to flex with changes in market dynamics.

Forecasting Processes – effective systems, processes and procedures will be needed to both capture any changes to lease data across the portfolio and to review and challenge the assumptions applied to market conditions so that provisions can be regularly reviewed and adjusted.

Liability Mitigation Strategy – how effective is your organisations strategy for tackling surplus property? Effective surplus lease mitigation extends far beyond simply trying to sub-let surplus premises to reduce the cashflow deficit. More aggressive exit strategies aim to permanently extinguish lease liabilities on commercial terms giving certainty and removing future risk.

How Taylor Brooks Can Help?

Lease Review, Data Capture and Audit
We can undertake a review of relevant lease data, database management and supporting processes to capture the data required for financial modelling and advise on missing data and processes for keeping databases up-to-date.

NPV Provision Assessments
We can calculate provisions for both individual properties and portfolios combining factual data on lease terms and holding costs with assumptions on market variables to provide an NPV cost assessment for auditors to approve.

Liability Mitigation Strategy
We can advise on strategy options and manage the mitigation process from direct negotiation with landlords on lease surrenders to the marketing of surplus properties for disposal either directly or by adopting a virtual ‘fund management’ role for your organisation and managing external letting agents on your behalf.

Why Use Taylor Brooks ?
During his 22 years at the Co-operative Group, Taylor Brooks founder Geoff Player had overall responsibility for mitigating the Co-op’s substantial surplus lease portfolio derived from numerous corporate mergers, acquisitions and trading activity.

His extensive experience includes the calculation of provisions, transactional solutions including sub-lets, surrenders and freehold acquisitions and more holistic portfolio wide solutions such as lease liability transfer agreements and variants thereof.

Taylor Brooks can bring this experience and focus to your surplus lease portfolio and ensure that all effective options are pursued to reduce future risk and optimise profitability.

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