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Research reveals a mixed picture on flexibility of commercial property leases – University of Reading

Research from the University of Reading on commercial property leases has been published by the Office of the Deputy Prime Minister. This is the interim report from the team monitoring the operation of the Code of Practice for Commercial Leases and shows that whilst that some aspects of leases such as lease length and repairing covenants are more flexible than in the past, many business tenants are still subject to upward only rent review provisions and to other restrictions, particularly if they decide they no longer need the property. This report, written by Professor Neil Crosby and Cathy Hughes in the Department of Real Estate & Planning in the Business School and Sandi Murdoch in the School of Law, is the latest instalment in a long running policy debate concerning the operation of the commercial property landlord and tenant relationship in the UK. The research, undertaken in co-operation with Investment Property Databank, who are the largest provider of property investment market information in the UK, has found that lease lengths have continued to fall. In 2002, the average rental value weighted all property lease length in the prime commercial property market had fallen to 13.8 years and, across the market as a whole, which includes both the better located property let to corporate tenants and the smaller secondary properties let to small business tenants, the rent weighted average lease length was 13.2 years. However, it also found that 87.4% of all rent reviews and 98.4% of rent reviews in leases in the prime property market were still upwards only. However, research into the negotiation of leases suggests that landlords are not offering alternative forms of rent review to tenants but equally tenants are not requesting those alternatives. Historically, UK occupiers have leased property for very long terms, longer than virtually anywhere else in the world, and before 1990 terms of 20 or 25 years were common. The recession and property market crash of the early 1990s caused rental values to fall, but the upwards only nature of the vast majority of five yearly rent review patterns within these leases caused actual rent payments to remain static. Some tenants caught by this provision in the early 1990s and forced to pay above market rents complained to Government. Since 1995, the Government has sponsored two industry Codes of Practice with the aim of delivering voluntarily more flexibility and choice within the commercial leasing market and the team from Reading has been commissioned by the Office of the Deputy Prime Minister to monitor their operation. End Notes for Editors 1. The full Interim Report can be obtained from either the ODPM website at http://www.odpm.gov.uk or accessed from the Centre for Real Estate Research at the University at http://www.rdg.ac.uk/crer. 2. The 2002 Code of Practice can be accessed at http://www.commercialleasecodeew.co.uk 3. The research team carried out three main tasks for the Interim Report. Trends in lease structures have been measured through the analysis of data to the end of 2002 from two main sources, the Investment Property Databank (IPD) (32,500 transactions) and the Valuation Office Agency (VOA) (50,000 transactions). In addition, interviews of property agents and solicitors were carried out in nine different locations across five different regions of the UK. These interviews examined the process by which lease terms are agreed and have been used to provide a preliminary picture of the degree of choice being offered to tenants. The survey also supplies more detail on changing lease terms and gives an indication of the position of small business tenants and of the influence of the 2002 Code. Finally, the team has reviewed current theory and practice on lease pricing and analysed the IPD data for any significant rental differences for individual lease terms. 4. The research team will produce their Final Report in December 2004, will expand and update the lease structure analysis for the second year of operation of the Code and will also report the findings of a series of questionnaire surveys of landlords, tenants, property agents, solicitors and lenders which will develop understanding of the degree of flexibility and choice in the market. 5. Further details can be obtained from members of the research team: Neil Crosby on f.n.crosby@rdg.ac.uk, Sandi Murdoch at s.e.murdoch@rdg.ac.uk or Cathy Hughes at cathy.hughes@rdg.ac.uk. Alternatively, please contact Craig Hillsley, the University's press officer, on 0118 378 7388, or email c.hillsley@reading.ac.uk