Gone are the days when 25 year leases were standard says commercial property agent Prop-Search with modern day leases becoming ever shorter. But is it worth signing up for a longer term?
In advising tenants, it is useful to consider the landlord’s point of view. The landlord will generally want a lease for as longer term as possible to maximise income, thus reducing voids, marketing expenses and general management to as little as possible. Also high on the landlord’s agenda will be the fact that a longer lease will significantly increase the freehold/investment value of the property.
Ian Harman, a Director of Prop-Search, says: “A longer lease will give the landlord more value and from a tenant’s point of view, this value can be shared by way of longer incentives such as rent frees or capital contributions, and/or more favourable lease terms.”
“However, in the current economy, lease flexibility is paramount for most tenants in order to have an exit route in the event of the business getting into problems or to accommodate expansion plans. The options are, therefore, to take a short lease or a longer lease with break options.”
The advantage of a short lease is that the tenant can vacate at the end of the lease and stamp duty payable at the beginning of the lease will be kept to a minimum. Stamp duty is calculated as a percentage of the total rent payable over the term of the lease. The main disadvantage of short term leases is that landlords will be reluctant to grant security of tenure (i.e. the right to automatically renew the lease at the end). Furthermore, at the end of the lease a new lease will need to be negotiated and drawn up which involves legal expenses and potentially surveyors’ costs.
A longer lease with break options gives much the same effect as a short lease but avoids the expense of regular lease negotiations and drafting. The trade-off is high stamp duty and again landlords are reluctant to grant security of tenure for leases with regular break options. In this respect, it should be borne in mind that it is the ‘guaranteed’ term of the tenant’s occupation that the landlord is interested in and from a landlord’s viewpoint a longer lease with regular break options will be seen as having little more advantage than a short lease.
A longer lease without breaks could well be worth considering depending on your business. If you have invested heavily in a building and/or plant and machinery which would be difficult to move, then in all probability you are likely to be in the building for some time. Furthermore, the costs of moving and fitting out of premises together with the general upheaval and staff/management time involved, makes moving an expensive process which most companies would prefer to avoid. Even in the current lease environment of regular break options, the fact is that few break clauses are exercised.
Ian Harman adds: “As the economy improves and unless your company has squeezed into a minimal floor area as part of a cost reduction process, then the chances of you needing to move within the next three years are probably likely.”
“By taking a longer lease you are more likely to obtain security of tenure which gives the benefit of tenant biased legislation that governs negotiations at the end of a lease. A longer lease also prevents you either being forced to relocate against your will or alternatively being in a poor negotiating position without the right to stay. If you are looking to sell your business or to invest in expensive plant and machinery or fitting-out which needs to be written off over a number of years, a longer term lease can also be advantageous.”
The most immediate advantage of a longer term lease is that this will substantially enhance a tenant’s negotiating position. Landlords will generally be prepared to offer much better incentives to encourage a tenant to take a longer lease in terms of rent free period or generally more favourable lease terms.
The obvious downside is that you are tied in to the lease until the end of the term. However most leases do allow the premises to be sub-let or assigned (i.e. the lease transferred or sold) and therefore whilst the responsibility and expense of this will be down to you, leases are regularly transferred as part of the day to day property market.
