Short-term vs. long-term commercial leases

Short-term vs. long-term commercial leases

It used to be the case that long-term leases were the norm, but since the pandemic, short-term leases are increasingly coming to the fore. Both options bring their own implications for commercial tenants and landlords. Here we discuss the features of each along with the pros and cons to help you sign a lease that’s the right fit for your goals.

What is a short-term commercial lease?

A short-term commercial lease is an agreement between a business and a commercial landlord to occupy a building for a period of between one and five years. This relatively short timeframe provides flexibility and enables the business to test the market and location and expand or downsize as required. 

Short-term commercial leases can also be attractive to landlords as they often command higher rental prices due to the additional demand. Void periods also tend to be shorter and they give you the opportunity to assess prospective tenants before making a long-term commitment.

Short-term vs. long-term commercial leases

It used to be the case that long-term leases were the norm, but since the pandemic, short-term leases are increasingly coming to the fore. Both options bring their own implications for commercial tenants and landlords. Here we discuss the features of each along with the pros and cons to help you sign a lease that’s the right fit for your goals.

What is a short-term commercial lease?

A short-term commercial lease is an agreement between a business and a commercial landlord to occupy a building for a period of between one and five years. This relatively short timeframe provides flexibility and enables the business to test the market and location and expand or downsize as required. 

Short-term commercial leases can also be attractive to landlords as they often command higher rental prices due to the additional demand. Void periods also tend to be shorter and they give you the opportunity to assess prospective tenants before making a long-term commitment.

What are the pros and cons of a short-term commercial lease?

Pros and cons for tenants

Pros

• More flexibility to switch location or expand or downside your space
• Less commitment and financial risk
• Less financial responsibility for repairs

Cons

• Higher rental and moving costs
• Less stability
• Cannot make significant alterations to the space

Pros and cons for landlords

Pros

• Higher rental prices
• Reduced vacancy periods
• Being able to evaluate prospective long-term tenants

Cons

• Less long-term income security
• The possibility of more frequent void periods
• Reduced negotiating power on lease terms as tenants can move on

What is a long-term commercial lease?

A long-term commercial lease is generally considered to be any lease agreement of over five years. They can last for up to 20 or 25 years, with deals extending beyond that now quite rare. Long-term commercial leases are most common in industrial properties and warehouses where businesses require a stable and enduring presence.  

What are the features of a long-term commercial lease agreement?  

Complexity

The extended duration of long-term commercial leases means they tend to be more complex, with comprehensive legal protections and agreements. That can add to the legal costs for both landlords and tenants and often requires extensive negotiations.     

Stability

One of the key features of long-term lease agreements is the stability they provide for tenants and landlords. Tenants benefit from having a predictable tenancy arrangement that gives them continuity in their operations without the interruptions and costs of repeated relocations.

Landlords, on the other hand, have income security and guaranteed occupancy for a set term without the costs and effort of regularly finding new tenants. It can be beneficial for both parties to negotiate favourable break clauses.

Security of tenure

Many long-term leases offer statutory security of tenure, which gives commercial tenants the right to renew their lease when it ends. That can benefit tenants who want to remain in the same premises. 

Landlords can remove the statutory security of tenure from the lease by following certain legal procedures. That can give them more control over their property if, for instance, they want to find a new tenant or use it for a different purpose. 

Building modifications

Long-term tenants are more able to make moderations and alterations to the property to make it better suit their needs, although they will need the landlord’s approval. Commercial leases usually include an obligation for the tenant to return the premises to its original condition at the end of the term.

Cost  

Long-term commercial leases are typically more cost-effective for tenants due to the lower rental rates and reduced moving costs. However, the higher rent value over the longer term means you will incur greater stamp duty land tax (SDLT). Tenants must also pay the landlord for managing the property via a service charge.  

The lower demand for long-term leases means rents are usually lower for landlords and rent reviews tend to be less frequent. Rent increases are usually linked to a predetermined formula, but if market conditions change quickly, the rental price can fall below the average. 

What are the pros and cons of a long-term commercial lease?

Pros and cons for tenants

Pros

• Stability, continuity and ability to plan and budget for the future
• Cheaper rental rates to incentivise commitment to a longer term
• No relocation costs or hassles

Cons

• Limited flexibility and ability to react to market or business changes
• Renegotiating or terminating the lease prematurely can be complicated and expensive
• Initial negotiations can be complex and time-consuming

Pros and cons for landlords

Pros

• Reliable long-term income improves financial planning
• Less frequent turnover reduces the costs associated with new tenants
• Enhanced occupancy increases rent security

Cons

• Less control over the property
• Less ability to adjust rental prices or lease terms to reflect market conditions
• It can take time to find a long-term tenant and negotiate a lease

Need advice?

Whether you’re a tenant or landlord, if you’re considering entering into a short-term or long-term commercial lease, you should always seek professional advice and practical guidance from a team you can trust. At Eddisons, we offer a commercial lease advisory service to protect your interests and align your lease with your goals. Get in touch to discuss how we can help you achieve your business and investment objectives.