Beyond The Term: How Long Is Your Lease?
Here, Landlord and Tenant Expert and Real Estate Partner at Beyond Corporate Law, Hannah Al-Shaghana, explains why Landlords and Tenants are looking at the changing nature of the Contractual Term in a Lease.
What does “Term” mean?
A lease is the grant of a right to exclusive possession of property for a fixed period of time. This period is commonly referred to as “Term” or “Contractual Term”.
Some commercial leases are protected by the Landlord and Tenant Act 1954 (“1954 Act”) (which means that a Tenant has a statutory right to remain in the lease at the end of the term, so long as a Landlord cannot establish a statutory ground to oppose such a renewal).
Some leases are not protected under the 1954 Act (known as a “contracted out lease”) and therefore the Tenant does not have any rights to renew the lease at the end of the Term.
Whether you take on a contracted-out lease or a normal protected commercial lease, determining the term of that lease is a matter for negotiation between the parties. 15 years ago, when I first specialised in Real Estate, the average term of a lease I was dealing with (particularly in the retail and office sector) was 20 to 25 years. Some of those leases did not even include a break clause!
In 2022, lease terms now look completely different. The current economic climate driven by macroeconomic factors such as the 2008 financial crisis as well as the Covid-19 pandemic have significantly altered the business landscape.
Post 2010, I noticed a real shift in Tenants taking shorter term leases (often containing multiple break rights) in order to give them more flexibility in determining whether they wish to remain in those premises. This was particularly common in the office sector.
Fast forward to 2022, most office premises are only half occupied due to the amount of hybrid and flexible working arrangements. A long-term commitment in business premises is now seen, by some businesses, as an unnecessary expense.
Another reason why I think the term of leases have shrunk considerably in the last 15 years is the liability to pay Stamp Duty Land Tax (“SDLT”) to the Revenue. For instance:
- If a Tenant takes a 5-year lease at a fixed rent of £50,000 plus VAT for the duration of the term, the SDLT liability would be £1,209.
- If the same Tenant decides to take a 10-year lease (with or without a 5-year break) at an initial rent of £50,000 (exclusive of VAT) with rent review on the 5th year of the Term, the SDLT liability would be £3,489.
- In the same circumstance, if the business Tenant decides to take a 20-year lease with multiple break clauses with an initial rent at £50,000 exclusive of VAT for the 5 years of the term, the SDLT liability will be £7,027.
Some Tenants therefore prefer to take shorter term leases which attract a lower SDLT liability. This gives them the option to consider at the end of the term whether they wish to remain in that location as opposed to committing to a 10-year lease with a 5-year break clause which would attract double the amount of SDLT.
There are many reasons why a Tenant may wish to have more flexibility in relation to its occupational arrangements and there is certainly a trend in the market for negotiating shorter terms to provide for that flexibility. Will this pattern of short-term leases continue into the future? Only time will tell.
Should you require any advice in respect of commercial leases, please do not hesitate to contact Hannah Al-Shaghana on the below details.
By Hannah Al-Shaghana