Episode 4: Foreign Exchange with John Marley, Smart Currency Business transcript

Ed Surman: (00:00)
Hi, I’m here today with John Marney who is a business analyst at Smart Currency. So, we’ve worked with Smart Currency for three years, as a company. We really love what they do. They have a very, very good offering to small businesses with moving money across borders, changing currencies. And, I’m here today to talk about the benefits of having a plan in place to move money across border and what kinds of things SME’s should look for and kind of solutions that we can use to help small businesses move money around the world with ease and control. John has had a career in FX markets for over 25 years. The financial institutions like ABN Amro, RBC and Credit Agricole before moving onto smaller FCA regulated institutions and is now at Smart Currency Business. The business of Smart Currency Exchange Limited has been supporting businesses for over 14 years moving money around the world. And I feel that sort of in the early days of this podcast and we’re talking about some technical issues we are having on leases soon, we think currency is really, really important area to discuss. Also it’s timely, as you know, we have Brexit uncertainty currently affecting different businesses in different ways and a good discussion and full discussion. During today will be a good starting point to help us navigate those choppy waters. How you doing today John?

John Marney: (02:57)
I’m good thank you very much. Thanks for having me.

Ed Surman: (03:00)
I’m really, really happy you came. So, just tell us a little bit about what Smart Currency does and when companies should really consider when to think about how they swap money. Do you think it should be from day one of a new company or when do you think it really matters?

John Marney: (03:19)
So we’ll start with Smart and as you quite rightly said Ed, we’ve been around for about 15 years and we’ve had really consistent growth. So that we’re now actually up to about a hundred employees. The mission from Charles Purdy, the owner has always been to help companies understand the risks that they have, specifically around currency and sort of volatility in foreign currencies. And we then, our DNA is really to take a holistic approach to go into companies and to give them every support we can and make sure that we understand their situation and their requirements before going any further. At that point we really want to look at setting, giving them some support and guidance on how to set the right budget rates for their business. And then with those budget rates, if they are applicable, the idea is to give them solutions that will help them attain those budget rates. And really the end goal is that they don’t have any nasty surprises from currency movements and they can get on with doing whatever business they do with their margins and their cashflows protected.

Ed Surman: (04:32)
So I mean, when we talk about budget rates, we’re saying, we’re setting exchange rates in our budgets for the next year or so. What sort of rates should companies have in mind or what sort of spread in terms of the volatility of a price move? What sort of things should businesses be thinking about there?

John Marney: (04:57)
I think that it’s a common question, a question that we get asked an awful lot when we go in and see people is, where do you think it’s going? Where do you think we will be in three months, six months, one year’s time? And really one of the answers that we give very, very frequently is that no one actually knows. That’s partially the point. No one knows exactly where it’ll be in a year’s time. And a very old answer to that question is if we did know we wouldn’t be doing this, we’d be trading the markets ourselves and making an awful lot of money doing that. So without that knowledge, the best thing to do is to be able to forecast your cash flows. That’s the key. And then at that point have an idea of what you expect. Given the current rate, those cash flows are going to return to you in that other currency. And as long as you’re happy with that, then really the best thing to do is to hedge that situation. And as we said, you then have visibility over your cash flows as long as they are reliable in that you forecast it and then you can get on with doing the business. The last thing in the world that people want to do, because you’re right there, to go back to the number of the question, currencies move around a lot. If we look at sterling against the dollar, that moved almost 7% in January this year.

Ed Surman: (06:19)
Yeah. I mean let’s not even talk about the referendum result, even just month on month, you know, it’s madness.

John Marney: (06:25)
The referendum result provided obviously one of those big digital moves. So we knew when the referendum was going to be, no one actually really expected, the result was going to be what it was. But we were fairly sure that had that result come through we knew that sterling was going to be lower on the next day. You’re absolutely right in one day sterling fell the best part of 15% against various currencies. And that is exactly the situation we want to avoid because that’s the kind of move, if you’re not prepared for it and if you’re not hedged for it, that can wipe out companies. And it did. There were various companies who went to the wall just because of that move. And it’s exactly the situation that we’re trying to avoid for people. As we said, a 7% move in January, that could have been very, very hard for some people, especially those companies, lot of companies set their budget rates at the beginning of their financial year and quite a few of them have financial years that end in December. So a lot of companies would have been looking at their forecasts in January and then trying to decide from those forecasts what kind of hedging they should put in place.

Ed Surman: (07:38)
So when we’re talking about when, we’re indicating that people set their budget rates at the start of the year, do you ever go in with companies and say, look, we’ll take a view of where we think sterling, dollar, just to keep it simple, might be in say six months time, would you apply forward rates sometimes in budgets? Or would you not really go to that layer of complexity?

John Marney: (08:00)
So those are two different questions. You’re absolutely right. It’s generally the start of the year when people analyse their cash flows, their forecasts. An,d then that’s also when they look at an appropriate budget rate. And at that point you have the prevailing rate in the market, which is what we call the spot rates. And then you will have forward rates, and the forward rates are just the interest rate differentials of the two currencies, applied to the current spot rate.

Ed Surman: (08:28)
So example would be again, dollar, sterling. The Federal Reserve is quite hawkish with interest rates. So they want to keep raising the rates and the UK would probably like to, but with Brexit uncertainty, they’re keeping it flat. So the long term trend is actually that the dollar is going to become more expensive for UK buyers.

John Marney: (08:49)
That’s certainly true. The other point is as you said, you’ve got the FOC who we have US interest rates at the moment, that are 2.5% and you have UK rates, which are still 75 basis points 0.75%. So if you want to sell dollars but you want to sell them forward, which means that you’re actually keeping hold of them for the time being, you’re going to be penalised for not giving those dollars up right now because you’ll be able to get 2.5% on the dollars that you keep. And obviously the person who was expecting the dollars, let’s say we’re holding sterling, will only be able to get 75 basis points, 0.75% so the forward points are about readjusting those values. And so when we talk about forward rates, that’s all we’re really discussing is, given the current rate and given where those interest rate cashflows will make the difference, is the future values for those currencies, then at that point, that gives you the forward rate.

Ed Surman: (09:57)
I mean, it really is the only reliable place to start with forecasting a price. You know, everything else is pure, well not pure speculation, but pretty much pure speculation.

John Marney: (10:05)
Absolutely. And it’s a very good point. The one thing that we absolutely advise against is that kind of speculative activity and that kind of, it could even be argued that if you know what your cash flows are and you know that they’re reliable, then to do nothing is effectively speculation. Because you know what the rate is right now and you know what you can guarantee in terms of revenue. And obviously there are people out there who believe that the rate may improve for them and then they don’t do anything. But of course, by definition the rate can also worsen for them. And if it does, then your forecasted cashflows have just become worse. So it really is something that we try and instill in all of the people we talk to as often as possible. If you have reliable cash flow forecasts, the best thing you can do is to implement some kind of hedging strategy to manage that and to mitigate the risk from the currency moves as often as possible.

Ed Surman: (11:09)
Fantastic. So Smart Currency business is an FCA authorised payment institution. So your talk about hedging and about not speculating on prices when budgeting or cashflows makes you sound very sensible. So being an FCA authorised payment institution, what does that mean from a company that would, say a business, small businesses normally see their Lloyd’s or Barclays being a really reliable source of financial infrastructure? So not just holding deposits but borrowing money, making payments. I think actually that’s probably dying down in a way people go to all sorts of other providers now. If a business is saying, we want to use a company like Smart who isn’t the bank but we have this term FCA authorised. What does that mean?

John Marney: (12:01)
So the FCA authorisation is important because it guarantees the customer that their funds will be segregated and it means that they have security even, should in the very unlikely event Smart go bust, it means that their funds are absolutely segregated and secure for them. So that’s a very important part of that definition. I think in terms of the way that new offerings have come about, what we’ve found is that for a lot of, especially smaller businesses, they have found that while you say that traditional delivery method and the traditional relationship has been with their banks, the the level of service provided by the banks has been somewhat missing.

Ed Surman: (12:49)
It’s been crap. You’re polite, I’m not.

John Marney: (12:57)
And to some extent understandable. We all know that banks have closed down an awful lot of retail branches. We all know that following 2008 a lot of banks have had incredibly high costs and shifts in costs that they’ve had to somehow assimilate into the business. So a lot of banks have cut back on an awful lot of the servicing and support that they give, especially to smaller companies. And that’s really where Smart comes into the market. It’s exactly that kind of a guidance offering, a support offering, and then ultimately the ability to do that hedging through us. You mentioned the loan situation, we partner up with various business services, divisions so that we can offer things like trade finance, things like invoice finance, which again, help companies with working capital. If they have cashflow issues, it can help them out of those kinds of situations as well.

Ed Surman: (13:52)
I think that’s kind of fragmentation in some ways is very good actually. I mean, you can see all these different suppliers coming in and adding value, you know, crowdfunding and peer to peer lending. I think there are some serious risks with it going forward and particularly with liquidity. But sorry, hope that wasn’t too financial but actually, you know, it’s good that there are alternatives out there. So the other thing that’s happening in the financial services market and I follow some great, there’s some great podcasts actually on that. Obviously the public awareness of getting better exchange rates is becoming more prevalent. So using you guys, you’re very competitive. You trash the banks on rates. But obviously there are Fintech app banks like Revolut, that have business offerings that pretty much get their exchange rates as close to the interbank rate, which means that, when banks and companies and when banks and finance institutions buy money off the international markets, they are very, very close to the actual market rate. And if you’re using say the post office, maybe not the post office for that example, but a cash exchange office on the street, they will be having much higher rates that you’re paying. So what’s it been like competing with those banks that are really trying to almost remove all sorts of basis points straight in commission?

John Marney: (15:26)
I think that as you say, the Fintechs offer a very different product. So a lot of the time they really are about technology. They’re really about a platform that allows two people who have mutually opposing interests to meet each other. And that obviously then reduces the spread that they pay each other down to a very, very tight margin as you said. But it does sometimes mean that for those kinds of companies, you might have to wait, for example, for a price if someone doesn’t happen to have an opposing interest to you and they are very light on the service and the support side, so they aren’t really interested in a relationship. They are, they generally tend to be more predominant in the private client space or the individual space. And as I said, Smart, really our DNA is as a treasury risk management company geared up really towards SMEs and micro SMEs. We do have the facility to obviously make payments for private clients and for individuals within the companies that we’re dealing with already as our customers. But our focus is really on, as I said, providing that very high level of support, guidance and help to people and really building very long term relationships.

Ed Surman: (16:59)
I think it’s really important, we were talking earlier about your experience of working in big financial institutions where your customers you were dealing with, you know, they had treasury palms of the rope. Just talk to us really about the level of education and and customer service and insight you provide around the whole treasury and risk management solution. We talked about it and in debt and cash flows but really go into the kind of work you go into with your clients at Smart.

John Marney: (17:34)
Sure. My job is really to go in and visit the clients and as you said we are generally looking at the SME world. So we’re looking at people who quite often may not even have a hedging policy. They may be covering contracts in foreign currencies on a really reactive basis. So as and when a contract comes through, that’s when they cover it. That’s not necessarily bad, but it does mean that they are then vulnerable to foreign exchange variances throughout the whole year. And obviously as we said at the beginning what we would rather is, if you have a fairly good idea of what your cash flows are going to be, then cover as much of it as possible at the beginning of your financial year. So it’s really about giving guidance to people. A lot of our customers are specialists in their own fields. They’re very good at what they do, but we are talking about smaller companies. Sometimes they may be single owner companies where the level of expertise and experience in terms of hedging and in terms of knowledge about financial markets is very, very low. And it’s really a question of us going in helping them, sitting with them, making sure they understand what those risks are and how they can impact any of their KPIs, any of their bottom lines. And then once we’ve gotten to a point where they’re happy that they understand them and they’re ready to set some kind of rate, then we can start talking properly to them about what the best thing to do would be for them and for their business going forward.

Ed Surman: (19:17)
Yes. I think the other important thing to really consider now, it’s coming to a head and more of a pressing issue. So one of the blessings I think in the private sector at the moment is more and more and more SMEs are exporting or their supply chains are going more international and also supply chains are going more international as well, so buying goods from different countries in. So where services are great as a whole, what sort of risks do you think are going to get carried forward for the SME community if companies like yourselves are not going in and or the owners are not getting enough of an education of how really important this stuff is. I mean, I have plenty of examples where, you know, people have been buying foreign currency on the spots, at the time they really need it, and then, over the year they find out they’ve actually lost nearly all of their profit for the year. I mean that’s in the worst year. We’re talking about Brexit years here, the referendum year. But going forward it’s going to be kind of critical. It’s one of the, I think it’s the most important facet of the financial markets that meets the real economy, you know? So what kind of things do you think SME’s should be looking out for and what kind of risks do you see in the economy as a whole for small businesses, if that stuff isn’t really being talked about?

John Marney: (20:46)
It really comes down to currency volatility. And as you said, for a lot of customers who are exporting and exporting because of the drop in sterling and following the referendum, if you are able to export, obviously for a lot of companies then their goods have become that much cheaper to all the other countries, so exporting is definitely blossoming, but at the same time it really depends what you’re exporting. If you can manufacture locally and if you’ve bought all of your raw materials locally, then obviously you’ve sourced those good prices because you bought everything and serving and you can benefit from that lower level. However, if you are a clothing manufacturer and you have to buy in all your raw materials and you’re buying in cotton ….

Ed Surman: (21:35)
In Dollars as well.

(21:35)
In dollars or from India, from China, possibly Turkey, then all of a sudden you’re having, in the last couple of years you’ve been having to pay more money for those materials. So there is a real risk.

Ed Surman: (21:52)
It sounds like you’ve got to really predict. It sounds like it’s actually a lot, a big piece is about predicting your gross margins, right? So, you know, if you’re in a wholesale distribution company, you’re buying goods and selling them on, margins will always be under pressure because there’s always a competitor that can do it cheaper than you can. So if you’ve got a company with a very broad international supply chain on your purchases and costs side and then you’ve got a global market on your sales side, you’ve got two very, very, very big variables that if you have to forecast your business plan, your finance plan, your cashflow, you could be anywhere between a loss to a stonking profit, right?

John Marney: (22:34)
Absolutely. As you quite rightly said, especially when you’re on both sides of the coin. So if you are importing raw material and then exporting back out, you have double the risk in terms of currency volatility. It’s not uncommon for currencies to move 10% in a year. oYou get that wrong both ways and that’s 20% of your margin gone. Now that for most businesses is going to be something that they’d rather obviously not have to suffer and some of them literally won’t be able to suffer that kind of loss. It’s more, rather than margins, it’s more about the cash flows. Because if we can hedge the cash flows, then it guarantees your margins. So to go back to your question, actually what happens is if you don’t do it properly, then your margins get eroded. And that’s exactly the situation we’re trying to avoid for people.

Ed Surman: (23:29)
So let’s just quickly fire through some technical terms. We’ve gone through quite a lot. So I’m just going to reel off one words and just for the benefit of our listeners, we’re going to do some jargon busting. Okay. So, spread?

John Marney: (23:47)
Spread is effectively the price that you pay over and above what we call the interbank rate. So as you said, there is an interbank rate, which is seen as being the middle of the market and as the name implies, it is where banks trade with each other. It’s a very, very tight margin. And as with most business, because they are doing very big amounts, they get very good prices. So that’s really the benchmark that people use and when people talk about spread, really it’s the distance away from there that you will actually end up trading your contract at.

Ed Surman: (24:35)
Okay, cool. Then let’s go for the term spot?

John Marney: (24:41)
So spot is a financial market term. It basically just means for standard delivery, which is usually two days. So in the professional financial market, spot is for two day delivery. But given the smaller amounts and given the flexibility that a lot of SMEs need, spot effectively can really be anything from today. Settlement today out to two days.

Ed Surman: (25:10)
Cool, basis point?

John Marney: (25:13)
Basis point’s a good one. So basis point is actually an interest rate term. So a basis point is 100th of 1%. So if we write down 1% as being 1.00 a basis point is that second zero, the 1.01. So when we talk about central banks and we talk about moves that they may make in rates up or down, generally central banks tend to move 25 basis points.

Ed Surman: (25:46)
So that’s 0.25?

John Marney: (25:48)
A quarter percent. Exactly right.

Ed Surman: (25:49)
Yup. Cool. Great. So if you were a small, medium sized business, you haven’t done anything about your foreign exchange, you’ve just opened up a market in Asia or Europe. And you’re thinking, oh damn, I really should think about this. I haven’t organised this at all. I need to talk to someone. What, where’s a good place to start? What resources out there, obviously your own, but what resources out there are useful for small businesses to look at?

John Marney: (26:30)
I think the Smart Currency business aside, I would recommend to anyone that if they are new to dealing in markets and new to the experience of having foreign currency exposure, then they should definitely be talking to an expert. They should be talking to someone who will, as we said, go through their situation with them, explain to them what the risks are in very basic terms, explain to them how that is likely to impact their business if they don’t do something about putting some hedging in place. And then once it’s clear that they’ve understood that conversation, then at that point go through with them the possibilities, the solutions that are available to them. Because there are more than one, to hedge that currency risk off and as we said, to ensure those cash flows that they expect to come in from those other countries.

Ed Surman: (27:32)
Fantastic. Well John, thank you very much. Really, really insightful. I think we should be doing more on this. I also would say that if you are looking at foreign currency, look at things like UK Trade And Investment, the partner of international trade. I think you guys have actually done a lot of work with the UKCI and small businesses and moving currency around, is that right John?

John Marney: (27:55)
Yeah, we have a couple of partnerships. So we’ve got the UKFT, we’ve got BIFA the freight organisation, and then obviously with the IT, and the larger governmental organisations as well.

Ed Surman: (28:09)
So if you’re exporting, go through there, meet up with Smart Currency business, they’re based in London, they’re really really great. I’m really glad you came on.

John Marney: (28:20)
Thank you very much.

Ed Surman: (28:20)
Okay, cheers.

Episode 3: Commercial Leases with Jane Surman transcript

Ed Surman: (00:00)
Hi, today I’m with Jane Surman, owner and solicitor of Jane Hartley Associates, Manchester. Jane is the queen of Clean Street when it comes to commercial property. She houses institutions, alternative funds, and high net worth individuals as her clients. And I’m a little bit biased because she is my sister. When deciding to get our first episodes out there, we were looking at who would say yes easily, and also has some experience with audio broadcasting because obviously you used to run your own radio show didn’t you Jane? ,

Jane Surman: (00:41)
I did indeed, called the Monster Show on Salford City Radio. I played the mini monster and Rob was the major monster.

Ed Surman: (00:46)
And he used to do the whole solicitor thing where he’d say oh yeah, you know, we can’t quite say that. Is that right?

Jane Surman: (00:53)
Yeah. The show was more about kind of saying the things that people daren’t say. So I was the one who had to keep Rob in check, which was pretty tricky at times I have to say.

Ed Surman: (01:02)
So I’m bringing you in here today to talk about leases because, part of the Business With The Fun Guys series is that we have topical, and technical discussions around certain important things that small business owners, entrepreneurs, aspiring business owners and entrepreneurs need to think about when starting out. And actually getting some information on these things early on is always a big win. And obviously commercial leases can be a big sticking point for your first time entrepreneur. So let’s just dive straight in. You’re a first time entrepreneur, you’re going to need a place to rent and use. What kind of things do you look for?

Jane Surman: (01:51)
Okay, the first thing entrepreneurs look for is to find the right premises for them. And it very much depends on the business that they’re operating. So for example, offices which would probably be the easiest one, B1 users as we call them, they’ll obviously find a premises that they think would fit their business location, etc. They will then contact us once they’ve done a deal usually, with an agent and say these are the premises that I like. But when a business owner is looking for premises obviously it has to fit the bill for the business that they’re promoting. So like I say, offices is probably an easy one. Hairdressers are always going to look in high streets, etc. But just finding the premises is just one element. The lease is the main thing where it’s a product. It’s almost like a product, a lease, which a landlord has to extract as much cash as he can from that building. So whilst it’s great that an entrepreneur finds premises, they really need to think about the terms of the lease, which is where we come in.

Ed Surman: (02:58)
Yes. Normally you actually tend to do a lot more work on the landlord side because your client base is more on the investor side. But you do both sides and you like to think of yourself as a Gemini, is what you are saying and you should be.

Jane Surman: (03:12)
I’m a Virgo. But I am a bit of a Gemini. Yes, I have been very fortunate in my career that I’ve worked both with landlords and tenants. I’ve worked with very big corporate tenants building up their portfolio of offices to operate their business, etc. And so yeah, I gained experience from both sides, which I think has set me in good stead. So I’m pretty good on the phone with another lawyer who is acting for a landlord. I’m equally good as a tenant, once I get my teeth into something I don’t let go. What a lot of tenants don’t realize, especially new businesses is the financial implications it will have on them in the long run. Whilst it’s all nice and lovely at the start, it’s when you come to the end of the lease, where the disasters can happen and can hit their cashflow, which is obviously extremely important when running a business. As I well know.

Ed Surman: (04:04)
So what kinds of things can bite you in the bottom when you leave a lease as a small business owner.

Jane Surman: (04:11)
The main element is always what we call in the trade, dilapidations. So when an entrepreneur comes to me, explains that obviously, we’ve got a quite tight budget, etc. The first thing I’m always going to say to them is send me your Heads of Terms, don’t tell anybody you’re sending them to me and I will give you some input on what I think you should do. The main thing where landlords will basically hit you in the pocket is dilapidations, which basically is in connection with repairing obligations. So what I tend to recommend to any tenant is that when negotiating a lease always make sure you’ve got a Schedule of Condition, and the Schedule of Condition is basically setting out the standard of those premises at the time you take the lease. I think it’s only fair, to tenants that they should only be expected to put that back into the same state as it was when they first took it. They’ve been using it. So it’s only right that the landlord should be given back what he’d provided in the first instance. Most landlords will expect a full Repairing Insuring lease, which is where tenants can get into difficulty. So I always always emphasize that it’s really important to get a Schedule of Condition. The difference could mean something from £10,000 on a Schedule of Condition to say £50,000 plus. So we’re talking a lot of money because if you have a full Repairing lease, depending on the terms of that lease, you could be expected to put it back into a better state and condition than it was in the first instance.

Ed Surman: (05:56)
Now, you’re running quite tight budget in this situation.

Jane Surman: (05:58)
Yeah.

Ed Surman: (06:00)
Say for example, delapse, the building, hasn’t been surveyed more. You’re not taking a surveyor out yourself and say you find that, you’ve got wiring electricals that are not to the standards you’d be expecting as a tenant. And then say it comes to the end of your tenancy, the end of your lease three years, five years, and it turns out that you’ve got to contribute to rewiring or fixing the cabling inside that building. How can you spot those things early on to make sure that ….

Jane Surman: (06:38)
Well that’s why you have the schedule of condition. I would always recommend to a tenant, I know it’s an expense for a tenant to get a surveyor out there. But actually it’s an expense that you don’t want to not have, because that’s actually the person that’s going to save you a huge amount of money in the long run. It may well be, it is a bit of a gamble in a sense. If it’s a new build, one might think, well actually why do I want to bother with a surveyor? It’s a new build. I’m sure everything’s all good and we obviously check the due diligence. But even if it’s a new build doesn’t necessarily mean it’s going to be good. I’ve come across various new builds where we’ve had absolutely horrific problems, which I won’t go into. So if you’re going to spend your money as a new business getting premises, it is important to get a good surveyor to inspect it, carry out the Schedule of Condition, survey it, and equally get the lawyers to document it, which is where I come in. But it’s extremely important. I can’t emphasize that enough.

Ed Surman: (07:45)
Right. So before we go any further, let’s just do some jargon busting. Okay. So could you talk through a few technical terms, we’ve dived straight into the deep end, let’s just take it down a step. Okay? Lease?

Speaker 2: (07:59)
A lease is basically a set of rules and it’s for a certain period of time in which you could occupy premises at a certain rate.

Ed Surman: (08:08)
That’s good. Dilapidation?

Jane Surman: (08:11)
That’s at the end of the lease when you have to hand back the property to the landlord and you need to carry out certain repairs and if you don’t, then you may be liable to the landlord for the costs he sustains putting the property back pursuant to the terms of the lease.

Ed Surman: (08:26)
Schedule of Condition?

Jane Surman: (08:27)
That is a document which sits behind the lease, which basically states the condition of the property at the time you take occupation.

Ed Surman: (08:35)
Surveyor?

Jane Surman: (08:35)
They are the guys that go around the building and make sure it’s not about fall down and blow up.

Ed Surman: (08:41)
Property agent?

Jane Surman: (08:42)
A property agent is basically somebody who’s advertising premises to let.

Ed Surman: (08:47)
Estate agent?

Jane Surman: (08:47)
Estate agent. Yeh like an estate agent in effect.

Ed Surman: (08:53)
Cool. Right. So just while you’re going quickfire in the terms in that bit of the interview, let’s just talk about now, some of the structure of a lease. What should it say, you know, if you haven’t seen a lease before in your life. You have a 45 page document, you’re like, Oh God, what is in here? You don’t have an idea where you’re working from, you say, wow, this is just a volumous amount of text. Let’s go through the structure of one.

Jane Surman: (09:26)
Okay. So the structure of a lease, this is where the lawyer comes in because yeah, we always appreciate that especially for an entrepreneur and he’s taking premises for the first time. It’s quite a huge document. It’s like crikey, what does all this jargon mean? As you rightly pointed out. The main things a tenant needs to know we would always highlight in a summary that we send to them. But in brief terms, it’s what’s the rent? How long can I occupy it, or what’s the term? Am I getting a rent free period.? That means when you’re a young business it’s very important to try and get a rent free period. The reason for that is you’ve obviously got your fit out costs that you need to factor in, you need to establish your business, you might need a bit of a helping hand on the old cash flow.

Ed Surman: (10:16)
The important point there is that lots of landlords are quite willing to give that for long term leases.

Jane Surman: (10:20)
If you’re committing for a certain period of time than they’re more than willing to give you a rent free period. At the end of the day they want their rent and so they want to make sure that the term is comfortable and you’ve got the ability to pay.

Ed Surman: (10:33)
Very different to residential.

Jane Surman: (10:34)
Oh, completely. A whole different ballgame. The other thing is rent reviews. So for example, if you took a 10 year lease generally, and this is just generally, it’s always a matter of negotiation, but one would expect to have a rent review in year five. So that’s something else to factor in. A lot of entrepreneurs want to make sure they’ve got a break clause so that they can terminate the lease at a certain stage of the term of the lease. Again, for example, a 10 year lease, one would expect a break clause in year five so that the tenant’s got the ability to terminate that lease should it need to. Mainly to do with it’s business, if it’s not making profit or actually these premises aren’t quite working for us or for whatever reason it is, the ability to be able to terminate. The other thing for a tenant on the main terms would be what we call Alienation, which is a word they’re gonna think when they see the terms of the lease. But Alienation means, can I assign or sublet these premises? So for example, a tenant gets themselves into financial difficulties, what is their option? One option could be to assign it to another tenant and let them take on the responsibility or possibly sublet it to another tenant. They pay the rent to our tenants and then in turn pays the rent to the landlord. But at least it’s helping their cashflow because they don’t have that outgoing anymore. It comes with its own complications, but that’s the essence of it. So whenever you’re taking your lease, you need to make sure that you can assign it somebody or you can sublet it. At least you’ve got options if something goes wrong. Other provisions for a small business are usually guarantor or rent deposit. If I’m acting for a tenant, I would always be going, go with a rent deposit. Yes, it cuts into your capital, but better that than being a guarantor as an individual because the consequences could be quite, let’s just say damaging if something should go wrong. I’d say those were the main elements of a lease and terms to look at, and these will be generally found in the Heads of Terms.

Ed Surman: (12:52)
Okay. We’ve just talked about sort of the whole risk of things going wrong and getting as much of a helping hand as possible. Let’s just say things are running tickety boo first sort of, you know, five, six years you’ll come to the end of the lease and you look to renew. Let’s just talk through that process. When you know, you’ve got your renewal date five years out from when you first start. You’re going to approach year five. How soon from that renewal date should you look at sort of either renegotiating or extending the terms of those leases.

Jane Surman: (13:23)
I would always say to a tenant, think about it at least two years before the end of your lease.

Ed Surman: (13:29)
Wow. That’s a long time.

Jane Surman: (13:30)
Yeah. That is a long time, but actually leases can sometimes take a long time to document. That’s not through lawyers fault, that can be through ….

Ed Surman: (13:38)
You sure?

Jane Surman: (13:38)
Well it can sometimes be the lawyer’s fault and I’m not passing the buck here. There can be all sorts of factors, but I think it’s something that they need to start thinking about if not actioning. If the tenant’s happy and wants to stay in the premises, it would very much depend on the type of lease they have. So we have two types of leases. We have leases which are what we call within the Act and those that are without the Act, and what I mean by that is that certain leases will have the benefit of what we call the security of tenure rights of the Landlord and Tenant Act 1954 which means that the landlord must grant you a new lease on similar terms, obviously rent to be negotiated. However, if you have a lease, which is outside the Act, none of those rules apply. At which point it is a case of negotiation. So hence I’m saying think about it two years prior to your expiry date because if you have got a lease outside the 1954 Act, then you won’t have a right to renew. And if the landlord is not willing to renew with you or comes up with a ridiculous rent, you’ve got ample time to go and source a property and negotiate new terms.

Ed Surman: (14:50)
So you’re running a factory for example. Having a lease outside the Act seems a bit like commercial suicide, because you’ve got to remove a lot of plant and machinery and relocate your business if you’re running a lease under those terms cause you imagine if you could have a warehouse full of unfinished goods. You haven’t even thought about the lease and the landlord says to you, yes, sorry, I’m gonna knock it down. Turn it into a hospice. Bye Bye.

Jane Surman: (15:19)
Well, good point. In those instances, just before I go onto the other thing. If a landlord is redeveloping the land, even if you’ve got a lease inside or outside the Act, they can still refuse on the grounds of redevelopments. So there’s no guarantee, even if you’ve got the benefit of the security of tenure rights, that you’re gonna get a new lease. But to answer the first question, yes, depending on the type of business, so a factory as you rightly pointed out. Yeah. That’s where they reside. That’s where they’ve built up their good will. They’re not going to want to move out. That’s where they built their home. That’s their head office, that’s where they want to be. So it’s very important for that type of business to get a lease that’s within the 1954 Act to make sure it’s protected.

Ed Surman: (16:09)
Is our lease within the 1954 Act?

Jane Surman: (16:09)
Your lease at Tewkesbury? Yes of course. I negotiated it.

Ed Surman: (16:17)
Good. I was just getting worried, imagine us having to relocate, we’ve been relying on that place for a while. I was thinking, I hope we’ve got ours in the 1954 Act.

Jane Surman: (16:27)
I’m a Surman Ed, I always protect my own. So even hairdressers, for example, another type of business that needs to try and get a lease within the Act. They might want to sell their business in the future. And if they sell their business, they’ll want to sell the premises because that’s where the goodwill’s built up. The lease, while it’s certainly an investment policy for a landlord, it can equally be an investment policy for the tenant because they may want to sell their business in the future and any new buyer’s is going to want to make sure well, that’s where the foot fall is. That’s where I built the business. That’s where the goodwill is.

Ed Surman: (17:02)
It kind of works like say, you’ve got, you know, in a Riverside town, you have a cafe on a park where people, in the summer sit down and picnic and they might get a takeaway coffee or takeaway sandwich from there and eat it outside. I mean, the value in that is colossal. But it must have a knock on effect on the landlord because if they can’t change it into something else and they’ve got this, you know …

Jane Surman: (17:25)
They’ve got a regular stream of income. Landlords generally, as I would always say to any landlord, better the devil you know. If you’ve got a tenant that’s been there for years, paying the rent regularly, they’re not any hassle whatsoever. It’s not in the landlords interest to.

Ed Surman: (17:41)
So while we’ve been war gaming scenarios of Doomsday for the renters. At least we can come back and say, actually often stars do align and things tend to work out okay.

Jane Surman: (17:56)
Yeah, I mean the government recognized it many years ago, and in 1954 it implemented this legislation because there were a lot of businesses operating and they were finding themselves with no rights whatsoever and they’d have their businesses, you know, they couldn’t operate their businesses from the usual premises. They lost lots of money. Hence the government stepped in and made it legislation that these tenants are entitled to a right to them.

Ed Surman: (18:23)
I quite like that you have some Acts of law that are so old, but are still working quite well, you know?

Jane Surman: (18:29)
That’s the beautiful thing about law. It has some very old legislation which still stands to this day. Hence I’m completely addicted to law. But equally it kind of moves with the times and it’s ever changing, which is, you know, obviously we update our clients and make sure they’re aware of new changes and commercial leases is a big topical area. What was good back in 1960 is completely different now, but that’s where you have lawyers to advise you. We don’t want to bore you with details. You just need as a tenant, you just need to know what’s going to hit me in the pocket and how could I make sure and minimize that as much as possible. And that to me is what I love doing, is minimizing what my tenants have to spend on that, on their business. And in respect to the building.

Ed Surman: (19:16)
So speaking on pockets and prices. We talked a lot about, you know, cashflow mitigation, things like rent free periods, so you can do your this out to making sure that the schedule, that conditions are as tight as possible so that the risk of spending huge amounts at the end of a lease are avoided. When it comes to searching the property and a headline price. Obviously you’re a lawyer so you don’t tend to negotiate prices on behalf of clients.

Jane Surman: (19:46)
No, I mean I can’t advise. That’s a surveyor’s job and an agent. We always say to an entrepreneur, if you could afford one, get your own property agent because they negotiate very hard. We can help in many respects, but that’s the one element that we can’t help them on.

Ed Surman: (20:03)
But obviously you’ve seen so many different clients hunting for, new premises to lease, to let. The kind of things they do is they use property agents and surveyors. Obviously they do things themselves. So from the outside, what things have you seen your clients do to just check that the price is, you know, correct. What sort of things they can do?

Jane Surman: (20:27)
To be honest with you some don’t. Some do. Those that do have a property agent that can actually advise them as to whether or not that’s a competitive market rent, that’s good. Other tenants who don’t have that luxury, that can’t afford a property agent is more of a case of okay, can my business sustain that level of rent? And that’s pretty much it. So it depends on how and sadly is, as with anything in life, depends on how much money you’ve got.

Ed Surman: (20:54)
I remember when we were between leases before, and we weren’t going to use a property agent to help us find any of them. We didn’t see it as a necessary expense because our minimum point was just to renew our old lease because it didn’t work for us. But with the UK, let’s, let’s have a little look around, see what’s in the market. And you know, they were quoting ridiculous figures for stuff that was unoccupied for two, three or four years. And actually, you know, there was no real, you couldn’t really negotiate a price or fix it down. It was all, it seemed pretty fixed.

Jane Surman: (21:23)
I think a tenant can naturally do their research. They’ll go through the area, they look at various points so they can get a feel for what type of level of rent is going on in that area. I think it depends on your location. In London, I think it’s an absolute necessity to have a property agent by your side. It’s a ruthless area. So I love London. You know, but for other areas it could be quite, there’s an abundance of office accommodation here in Manchester for example. You’re bound to be able to cut a much better deal in Manchester because there’s so much office space available. So it does very much depend on the location of where you are. It’s not something I advise on, it’s just something I’ve learned through experience.

Ed Surman: (22:03)
Fantastic. We’ve talked a lot about the intricacies of the things that business owners should look for when leasing a property, but let’s just sort of put like an action plan scenario, hypothetical scenario together. I’m looking to lease my first business. Okay. What does that process look like in terms of the nuts and bolts and the correspondence I would have with you as a solicitor? And then how long would that take, what kind of things that have to happen?

Jane Surman: (22:35)
Okay, so from start to finish, so to start off with, we would usually get in touch with the landlord’s solicitor obviously when we’re acting for the tenant. I would be requesting the, what we call the contract pack, which would be the draft lease, which we need to go through and negotiate. We would also be looking at the title aspects and carrying out what we call the due diligence. And the due diligence is basically making sure the landlord owns the property.

Ed Surman: (23:05)
So looking on the land registry.

Jane Surman: (23:07)
Yeah. So they would send us all this information from the landlord’s solicitor. So we want to make sure that the landlord can let the property? Does he own it? Has he got a lender on there? If so we’re going to need consent to protect the tenant. We are also going to carry out various searches on the property. We need to make sure that he can use it for it’s given purpose. If it’s offices we need to make sure it’s got the correct planning permission for them to do that.

Ed Surman: (23:32)
B1 or whatever.

Jane Surman: (23:32)
Exactly. We would be checking out correspondence and various enquiries such as, is there any disputes going on at the moment? Are the meters separate? For example, I’ve had instance in multi-tenant. So you could have a multi-tenant block and let’s just say your office is above and you’ve got a hairdressers downstairs. Well I’d want to absolutely make sure I’ve got my own separate water meter because those hairdressers love their water. There is no way I am having a water meter shared with a hairdressers for example. So these are the sort of things we check. We are basically making sure that the tenant can use it.

Ed Surman: (24:15)
There’s a lot of practical knowledge that you’ve got to apply because, imagine if you’re a waspy kid out of university working real estate and you didn’t realize that a hairdresser uses, you know, lots of water.

Jane Surman: (24:27)
There’s a lot more practicalities, as a lawyer, that one has to advise the tenant on, even the simplest things like have you been in the premises and got your mobile phone out and tried to phone somebody? Because the last thing you want to do, you’re operating an internet business for example, and you’ve got no internet because the reception is so terrible you can’t talk on the phone. So even simple things like that, we always recommend to our clients. Go out there, make a call. I don’t care who you call, just make sure you can make the call. And how good is the reception? If you’ve not got good reception, it doesn’t matter how cheap it is. Move on out, find somewhere else. So all these little basic things, a restaurant for example. Okay, so yeah, you’re an Italian restaurant. Let’s just say, okay, there’s a lovely little pavement out there. Can we put chairs and tables? Well actually no, but however, if you need to put your tables out, because obviously that means more covers for them equals more money, then yes, we can talk to the landlord or we can talk to the local authority and look at maybe getting a license to have those chairs and tables out there. So it very much depends on the business that you’re operating and that’s the important thing. So for us as lawyers, we step our shoes in the business of whatever it is, restaurant, hotel, whatever it is. If I’m running a restaurant, what do I need to do? So every time we have a lease at Jane Hartley Associates where they’re thinking about their business product, what are they promoting and can we achieve that within the terms of this lease? Because as I said before, the lease is the Bible. Timing wise, it’s always how long’s a piece of string. You will never get out of the saying it’s going to take two weeks.

Ed Surman: (26:08)
You’re really awkward about that stuff, aren’t you?

Jane Surman: (26:12)
I don’t like to think we’re awkward. It’s just that we just can’t answer that question. It’s just an impossible question and actually we’re going to push it, but various hurdles can come against it. I can give you, I would say on average, I’ve pulled a commercial lease through in two weeks, I’ve pulled a commercial lease in a lot longer than that.

Ed Surman: (26:32)
What’s the longest commercial lease you’ve had to pull through?

Jane Surman: (26:34)
It was a very tricky deal. And there were a lot of arguments over clauses. So, that particular one took 12 months in fact. Well just over 12 months. But that was because of various factors, say for example, some tenants, they don’t want us to negotiate and that’s fine. But if we’re negotiating, it’s like anything in life. Patience is a virtue. Keep pushing and they will eventually give in. Sometimes they won’t, sometimes they will, but it very much depends.

Ed Surman: (27:09)
So you’ve done the due diligence? You’re then going to debate the clauses on the lease? Maybe do wholesale redrafts or sections, if it’s really bad? What’s the next step?

Jane Surman: (27:22)
So once you’ve got a file or a form of lease that goes out for signature, we will then agree a completion date, the money’s passed over. The other important thing to factor in is depending on the length of the lease is what do I need to do with that lease at the Land Registry. So it’s very important that a lease over a certain period of time must be registered at the Land Registry to be legally binding.

Ed Surman: (27:45)
So what sort of time?

Jane Surman: (27:46)
So if the lease is seven years or more, it must get registered at the Land Registry. Very important because otherwise it can have consequences.

Ed Surman: (27:57)
What if you’re running a three year lease, and you’ve run it for three?

Jane Surman: (28:00)
If you’ve got a three year lease that’s not what we deem a registerable lease. However, if it grants rights over certain areas of the landlord’s title, then we need to register that with the Land Registry in a different way called disclosable interest because we have to protect the rights that have been granted. But again, the tenant doesn’t need to worry about those technicalities. That’s where we come in. That’s where we make sure that they’re protected. So by that point, and by the time we’re dealing with Land Registry, our tenants are in, they’re operating their business. Happy days I’m not worried about that. And I’m not going to bug them about that. I just tell them when it’s all finished, that’s what they want to know.

Ed Surman: (28:39)
Nice. Great. Well thanks for coming on to this and talking all about leases.

Jane Surman: (28:45)
Thank you for inviting me, brother.

Ed Surman: (28:45)
Yeah, I think it was very helpful. Maybe we’ll get a bit more on commercial property. Give Jane Hartley Associates a Google in Manchester.