Lease length drops to record low

By Ewan Turney

- Last updated on GMT

Related tags: Leasehold estate, Renting

Tenants are able to negotiate rent free periods at some sites
Tenants are able to negotiate rent free periods at some sites
The average length of a lease has fallen to its lowest recorded level with 97% of small businesses having a lease less than 10 years long.  The...

The average length of a lease has fallen to its lowest recorded level with 97% of small businesses having a lease less than 10 years long.

 

 The independent analysis of 91,000 tenancies, published by the British Property Federation, found that the average lease length has fallen 10 months to five years in 2010.

 

 It said that 81% of businesses were now signing up to five year deals to avoid rent reviews and that 2010 was a significant year for rent free periods and break clauses as landlords and occupiers grappled with poor economic conditions.

 

 The average length of commercial leases has been falling since the early 1990s when the vast majority of leases were 20 or 25 years with upwards only rent clauses.

 

 The trend is reflected in the pub industry with Marston's introducing a new five year lease, called the Retail Agreement, which has no rent review. Enterprise Inns has also scrapped rent reviews on its new leases in favour of an RPI indexed increase with 10 and 20 year leases available.

 

 Punch is offering free-of-tie prices on its five and ten year deals.

 

 Pubcos have also been splashing out more than ever on tenants support in terms of extra discounts and rent free periods.

 

 Punch recently said it was spending just under £2m a month on helping out its tenants. Enterprise has spent an extra £30m supporting tenants over the past two years.

 

 Other key findings of the lease study were:

 

 • Average lease lengths have dropped over the past year to 5.4 for retail (6.5), 4.1 years for office (5.4) and 4 for industrial (4.6)

 

 • Average lease length for a small to medium business is 4.1 years compared to 6.6 for a large company

 

 • 72% of all new leases were five years or less — down from 6.6 years

 

 • The proportion of leases with a break clause increased to 29.4% in 2009/10, compared to 28.2% in 2008/09

 

 • The average rent free period on new leases in 2009/2010 was 10 months, with the average in the office market, 14.5 months.

 

 Members of the MA200 club for multiple retailers have also reported success in negotiating one way notice periods of six months, removing RPI increases, three month rent free periods and even substantial reverse premiums.

 

 Buyer's market

 

 "Leases have changed significantly over the past two decades with profound implications for landlords and tenants," said British Property Federation chief executive Liz Peace.

 

 "For small businesses, shorter leases are probably a good thing, with the pace of business change so fast these days it makes little sense for most small and medium sized businesses (SMEs) to tie themselves into the obligations of a long lease. Shorter leases have undoubtedly meant fewer businesses found themselves in trouble during the recession and therefore were able to survive it.

 

 "It is also important, however, that the property market is delivering variety. Long leases still play a crucial part in the funding of development of commercial property, even more so at this time when access to loan finance is severely rationed.

 

 "The income certainty that a long lease with an upward only rent review provides is often what funds a major retail or office development, or regeneration scheme.

 

 "Some larger businesses still want a long-term commitment to a building and if the lease is long they are likely to get a corker of a deal.

 

 "You could say the last year has been an 'occupiers market', but actually the revolution in lease terms has been taking place quietly over the last two decades and the last year just reinforces that."

Related topics: Property law, Legislation

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