Purpose

1.   
Cabinet approved a lease of Consort House on 23 July 2024.

2.   
Cabinet Report included the Heads of Terms.

3.   
Cabinet delegated authority to the S151 Officer in consultation
with the Director of Land and Property to conclude best value terms
and complete all associated legal documentation.

4.   
Agreement is sought to conclude best value terms which are further
revised from those set out in the report of 23 July 2024, and to
enter into the lease with the tenant.

5.   
The renegotiated terms reflect repair works
necessary to lease the property.
 

Content

It was AGREED:
 
To conclude best value terms and to enter into
the lease with FCHC.
 

Reasons for the decision

Reasons for Decision:
 

The Cabinet report of July 2024
included “The tenant will undertake due diligence ahead of
contract completion but any unexpected issues arising from surveys
will be negotiated to reflect the nature of the works needed. The
Council have no risk appetite to explore speculative or extensive
refurbishment works on this asset but may support matters that
support the long-term investment benefit.”
Due diligence undertaken by the
tenant identified repair and safety works required to the building,
classified as Landlord Works, which the landlord would need to
carry out prior to letting of the property to the
tenant.  
It was agreed between parties the
tenant contractor would carry out Landlord works and in return the
Council would grant the equivalent value of works cost, by way of a
rent incentive, and a financial payment on lease completion.
The Council’s letting agent is
of the opinion there are no other prospective tenants who would
offer as favourable lease terms, nor would alternative tenants be
prepared to forward fund the repair works in lieu of a similar rent
incentive.
If the lease does not proceed the
Council is left with a building requiring works to make a freehold
or leasehold disposal, at a cost equivalent to the value of the
rent incentive offered to the tenant. The grant of the rent
incentive is therefore cost beneficial to the Council.
If the works are not undertaken the
Council is left holding a building in disrepair that would be
highly unattractive to the office sales and letting market.
As noted in the July 2024 Cabinet
Paper; the freehold of the property was extensively marketed
previously with no credible interest. The Council’s agent
reports no improvement in market conditions and advises if the
building is let to the tenant the strength of their covenant will
increase the asset value supporting a freehold disposal on more
favourable terms to the Council.
Were the Council to directly
undertake the repair works, procurement and contractor mobilisation
timelines, would lead to an unacceptable time delay to the tenant
and likely loss of the lease transaction. The Council would be
liable for subsequent holding costs for the property.

The Redhill office market has an
oversupply of vacant offices and delay in finding a new tenant
would introduce significant risk to Council’s revenue
budget.
The tenant is regarded as a having
strong covenant strength as its rating is classified as very low
risk.
Due to the tenant strength of
covenant the building once let will become a more valuable asset
supporting a freehold disposal on more favourable terms to the
Council.
Freehold disposal value will be
enhanced with tenant in occupation and building works undertaken.
Without the building leased to a tenant of equal covenant strength
on the same (or better) lease terms the enhanced value will not be
achieved.
Loss of the tenant introduces the
risk any future letting would be subject to upward and downward
rent reviews, as per proposed government legislation, thereby
reducing the asset value.
The Council would be reluctant, due
to its speculative nature, to undertake repair works without a
tenant being secured.

 

Alternative options considered

The freehold of the property
was extensively marketed previously with no credible interest. The
Councils agent reports no improvement in market
conditions
 
If the building is let to the
tenant, the strength of their covenant will increase the asset
value supporting a freehold disposal on more favourable terms to
the Council.