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Government publishes much-anticipated report into commercial property lease negotiations – University of Reading

The final report of the two-year research study into commercial property leases has been published by the Office of the Deputy Prime Minister (ODPM). This report is from a University of Reading team, which has been monitoring the operation of the 2002 Code of Practice for Commercial Leases. The Reading report, written by Professor Neil Crosby and Mrs Cathy Hughes in the Department of Real Estate & Planning in the Business School and Mrs 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. For more than 10 years successive Governments have been concerned that business tenants were not being offered sufficient choice and flexibility in lease terms. A particular anxiety has been the continuing use of upward only provisions in rent reviews, under which rent can only go up or stay the same at each review. This concern was recently demonstrated by the ODPM's publication in 2004 of a consultation paper that set out proposals for deterring the use of such clauses. The debate over commercial leasing has polarised the industry, with landlords attempting to persuade Government not to legislate while tenants are arguing for intervention. The Reading report provides evidence to Government that will help to inform their policy decisions in this area. It shows that, while some significant aspects of leases such as lease length, repairing covenants and the operation and timing of tenants' break clauses have become more flexible, other clauses such as assignment and subletting restrictions remain very much as they have in the past. The research has also found that the upward only form of review still dominates the UK commercial leasing market. However, because of the fall in lease lengths, it found that the number of leases that had no reviews within them had increased and now stood at over half of all leases. The Report, as well as identifying the outcome of lease negotiations, also investigated the process by which leases were negotiated. It shows that, generally, tenants were aware that proposed lease terms are negotiable; they were being given more choice on lease terms with lease length, tenants' breaks, assignment and subletting, repairing liabilities and review pattern the subject of more discussion in negotiations. While landlords rarely offered tenants up/down reviews, it was equally unusual for tenants to ask for them. However, small business tenants were found to be at a disadvantage. A majority were not professionally represented in the commercial part of negotiations for new leases, they were more likely to take leases on the first terms offered and lacked awareness of the details of their leases. The Code of Practice was found to be having little direct impact on lease negotiations but the Reading team does suggest that it is part of a wider pressure from Government, which has helped to encourage increased flexibility and choice in commercial leases since the property crash of 1990. Co-leader of the project, Professor Crosby, commented that: "Our interim report was greeted with howls of protest from the property industry and the property press who wrongly interpreted it as suggesting that there was little change in leasing markets. The final report confirms many of the findings of the interim report but, contrary to the above comments, indicates a varied picture of flexibility, choice and awareness. It remains to be seen if enough progress has been made to satisfy Government. We look forward to a thoughtful debate within the property industry on the findings of our research and the future of commercial property leasing." End Notes for Editors 1. The full Final 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 Commercial Leases Code of Practice can be accessed at http://www.commercialleasecodeew.co.uk 3. The Government consultation paper "Commercial property leases: options for deterring or outlawing the use of upward only rent review clauses" can be accessed at http://www.odpm.gov.uk 4. The research team carried out five main tasks for the Final Report. Trends in lease structures have been measured through the analysis of data to the end of 2003 from two main sources, the Investment Property Databank (IPD) and the Valuation Office Agency (VOA) numbering around 95,000 transactions over the last seven years). A set of 46 semi structured 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. The interviews were used to develop a wider set of questionnaire surveys of landlords, tenants, solicitors and agents. In combination, they provided information on the negotiation process and gave an indication of the position of small business tenants and of the influence of the 2002 Code. At the end of the project a set of 11 case studies was carried out to identify the motives of the parties where leases with upward only rent reviews had been agreed. 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. 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