The slow death of the long lease

By The PMA Team

- Last updated on GMT

Related tags: Leasehold estate

Charity: long leases need a good strategy
Charity: long leases need a good strategy
Tenants signing up to long leases need to have a very strong business strategy to survive the full term, says The PMA Team.

It often feels like the world of pub leases and tenancies exists in its own parallel universe (having two words regularly used in this context is evidence; a tenancy usually refers to a shorter three-year term in the pub world, but a three-year tenancy is actually a short lease).

Pub leases have their own system for setting rents and have their own business rates, which are quite different from other commercial properties. I've said this before and I'll say it again: pubco landlords, despite the slight loosening up of the past 12 months, generally hand lease contract terms down on tablets of stone; there's still comparatively little in the way of free-wheeling negotiations over precise terms.

Some of the tenanted pubcos have produced new, more flexible leases in the past year and anybody would have thought they'd invented the combustion engine, judging by the amount of time it's taken in some cases — slow coach Punch Taverns is finally launching a new lease this month on a limited geographic trial that it began working on in late spring 2009.

It's interesting then to hear what's happening in the wider world of commercial leases — and compare it to our world. An independent study of 91,000 leases shows a 20-year trend away from long leases. A quiet revolution has taken place since the early 1990s when the vast majority of leases were for 20 or 25 years and contained upward-only rent reviews.

The average retail lease is for 5.4 years, while 90% of new leases are for 10 years or less. Put simply, long leases are now seen by lessees in the wider world as containing far too much risk because it's anybody's guess what could happen to the economy and to retail trends in a time span of two whole decades.

Those who do sign up to, say, a 20-year lease, will want to insert break clauses and expect really meaty landlord incentives for a period of this length. In the wider commercial property world, three in 10 leases now contain a break clause. Not surprisingly, given the state of the economy, it's a lessee's market with the average new occupier given a 10-month rent-free period.

The smaller the tenant's business, the shorter the lease. Large companies took an average lease length of 6.6 years, while smaller businesses signed up for 4.12 years, on average.

In our sector, the lessons are obvious. Those signing up for very long leases need to be supremely confident and supremely able — they're betting that they can overcome anything that the economy, local competition, wider food and drink trends (and the landlord) can throw at them. It's striking how sensible business models have their efficacy proven over and over by the passage of time.

There were always very good reasons why regional family brewers were reluctant to grant long leases — sometimes the long game requires landlords to protect tenants from themselves.

Related topics: Property law

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