Should businesses be negotiating flexible lease terms on commercial property?
In my recent article, How should a Landlord approach subletting to tenants in a post Covid Environment, I referred to the need for greater flexibility from landlords.
Last week institutional landlords Legal & General announced that they are prepared to move away from upward only rent reviews and long leases. When it comes to the retail sector they are prepared to “share the risk“ with their tenants which means having rents geared to turnover.
Of course, the devil will be in the detail when it comes to negotiating flexible lease terms. I would expect that landlords will want a minimum turnover threshold and if the tenant is not performing for whatever reason they will have the ability to terminate the lease if those thresholds are not met
A 10-year term for a lease may soon be regarded as a long lease. We could see more than one tenant only break clause, becoming the norm, giving the tenant the desired flexibility to terminate the lease at various stages during the occupancy. Another factor to bear in mind is that you do not get any money back in respect of any stamp duty land tax paid (please see below) if a tenant exercises its option to break the lease. Therefore, shorter leases without break provisions may be preferable.
With shorter leases becoming the norm the trend seems to show that three, five and seven year leases are becoming more popular.
Obvious benefits of shorter leases, apart from not entering into “long-term contracts”, is that there will be less Stamp duty land tax payable (as the tax is calculated on the aggregate of the term of the lease using the first five annual rents) which has cash flow benefits, important at any time, but more so in the current climate.
There may be little downside for the tenant with regard to the continuity of their business if the lease has security of tenure and protection of the Landlord and Tenant Act 1925, in being able to renew the lease (subject to a handful of the grounds that the landlord would have to establish to be able to refuse to grant a new lease) when the term come to its end.
A three year lease may have its downsides as in effect it does mean a rent review on the renewal of the lease after 3 years whereas a five year rent cycle has been the most common to date.
A five year lease has probably been the most popular lease length, mainly to fit the most common rent review cycle. Whereas the seven year term may be subject to a rent review but will not be registrable at the land registry (unless you want to register any rights/easements over adjoining property not within the space being taken) which can mean savings in land registry and legal fees. As only leases of more than seven year are registerable, three and five year leases will have the same appeal.
Covid-19 has given us all a reality check and has made us aware of our vulnerabilities and therefore tenants may wish to try and mitigate their risk against any future pandemics and seek that there be a clause in the lease which suspends annual rent if the government imposes mandatory measures that impact on the use of the property. Therefore it looks, there may be more “yogo” to come.
Contact our commercial property law team in Brighton & Hove, Sevenoaks and Uckfield
David Ashton is a Partner in Rix & Kay’s Commercial Property Team and has over 30 years’ experience of advising landlords and tenants on complex lease negotiations. For an informal chat and more information contact David e. firstname.lastname@example.org t. 01825 745 366