Long term changes to commercial property leases
It is now a rarity to see a 25 year, fully repairing and insuring lease – a common sight up to the end of the 1970’s / early 1980’s on office buildings, industrial units and retail property. Believe it or not the average lease length is now in fact just over 4 years
Most tenants appear to be driven by both an increased desire for flexibility and a decreased desire for the financial obligations that a long term lease binds them to. This is despite the fact that in some cases tenant fit outs tend to be amortised over 10, 15 or even 20 years – particularly true on the leisure sector. In that case tenants seem to request break clauses. The general decrease in lease length is increasing landlords liabilities and with a tightening commercial property market this could result in higher occupational costs for tenants.
The notable exception to this trend is leases that have been agreed on design and build properties where longer terms, of say 15 years are necessary in order for the projects to be viable for lenders, developers and investors.
Tenants are also seeking limited liability in respect of property repairs, particularly where lease length is relatively short. Landlords will need to be fair in the way these items are dealt with. Recent case law (Fluor Daniel Properties Ltd and others v Shortlands Investment Ltd) has found that even if a tenant is liable under their lease for larger costs, if they are deemed not to benefit from the works or that the works were unnecessary a judge may find in favour of the tenant.
One possible solution for landlords has been to add sinking fund provisions to leases whereby a tenant will contribute a reasonable proportion of the depreciation costs associated with a building to the landlord, for example lift replacement in office buildings, but this has often proved to be unpopular with tenants. So again if tenants want to wash their hands of these costs, inevitably rents will rise.
11 November 2013