2 September 2002
If the property market responds to the findings of the research carried out for the British Council for Offices (BCO), many of the features of the commercial letting market that cause such inconvenience to tenants would be swept away. Now may be the time for the property industry to respond.
The BCO's research report concludes that the UK has the least flexible leasing structure in Europe. Not so long ago standard lease terms were 25 years; even now, the standard term of 15 years is 50 per cent longer than all other markets. Contrast France, where tenants have the ability to break every three years but the right to remain in occupation for 18 years. In many countries it is unusual to have rent reviews; instead, rents are indexed in line with inflation. Only in the UK are tenants required to submit to an upwards-only rent review without an option to break, which would enable the occupier to vote with its feet if it did not like the reviewed rent.
Paradoxically, shorter lease terms and rights to break do not necessarily lead to a greater churn of tenants. In European markets, turnover rates tend to be lower than in the City of London. Of course, there may be many other factors at work, but it is telling that tenant moves take place every 12-15 years in Paris and Madrid, but every seven years in the City of London. So, on the basis of the evidence from Europe, landlords could concede shorter lease terms or earlier break clauses without risking losing tenants earlier.
There is clearly demand from occupiers for shorter lease terms. Research carried out by the University of Reading found that the most problematic lease terms for tenants are the length of the lease, break clauses, assignment and sublettings. Yet in 2001, the BCO Conference was told that one of the factors that made UK properties such an attractive investment was the current lease practices and structures. So there are clear economic reasons for investors not to switch to more flexible leases.
This has prompted the Code of Practice for Commercial Leases in England and Wales to dictate that landlords should consider offering tenants a choice of length of term, including break clauses where appropriate and with or without the protection of the Landlord and Tenant Act 1954.
In a subdued or depressed letting market, it may be possible to force through such a dramatic change in attitude. If the Code of Practice is followed (which also requires landlords to offer alternatives to upwards-only rent reviews, priced on a risk-adjusted basis), it would be a real sea change for the property industry.
Shorter lease terms would lend themselves to standard form documents, so we might see the end of leases stretching to 75 pages or more. If rents were indexed, the cottage industry surrounding rent reviews would fall away: no more costly arbitrations and no more agonising over the valuation of fitting out works and headline rents. And if more regular break clauses were agreed, restrictions on assignment and subletting could be made much simpler - tenants will be much less concerned about freedom to assign or sublet if they know they can break the lease at regular intervals.
Will the Code of Practice for Commercial Leases lead to a regime that is closer to the European model described in the BCO research? Only time and the state of the market will tell. It is whispered that, where landlords have a development that is proving difficult to let, tenants are obtaining shorter terms, more regular breaks, and in some cases alternatives to upwards-only rent reviews. But where developments are in hot demand by tenants, the word on the street is that tenants are accepting full 15-year terms with no breaks and with conventional upwards-only rent reviews without protest. So the jaundiced view is that, unless the market changes dramatically, we are not going to see any significant change in letting practices.
However, the property industry should bear in mind that there is every sign that this government is committed to a change; and if it does not take place through the voluntary Code of Practice, the Government will force it through by legislation. And this time it means it. Landlords, then, should think very hard before deciding not to join those far-sighted institutions that have already altered their letting practice to reflect the Code of Practice.
Related CPD/EventsSign up for CPD/Events alerts
MBL Seminars Limited