SMEs dodge rent reviews with shorter leases
Last year was characterised by many as an occupiers’ market, but the British Property Federation says a revolution in lease terms has been quietly underway for the past two decades – and its survey of leases during the past year underpins these findings.
The BPF/IPD Annual Lease Review for 2009/2010 – the 13th edition – analysed 91,000 tenancies and shows that average lease lengths were at their shortest ever this year, falling to just five years, from 5.9 years in 2008/09. Small businesses are increasingly signing shorter deals, the BPF says, with 81% of them on leases of five years or fewer – and therefore unlikely to face a rent review. Only 3% of small businesses are on leases of more than 10 years.
The review also shows that 2009/2010 was a significant year for rent-free periods and break clauses, amid the poor economic conditions. The BPF adds, however, that the trend towards shorter leases has been underway for more than 10 years now, “also illustrating significant long-term change in the commercial property market and our economy”.
Back in the early 1990s most leases were typically for 20 or 25 years and often contained upward-only rent reviews. By sector, lease lengths in 2009/2010 were on average 5.4 years for retail premises, 4.7 years for office space and 4.0 years for industrial property – all three have come down substantially over the past year.
Liz Peace, chief executive of the BPF, said: “For small businesses, shorter leases are probably a good thing, with the pace of business change so fast these days it makes little sense for most small and medium sized businesses (SMEs) to tie themselves into the obligations of a long lease. Shorter leases have undoubtedly meant fewer businesses found themselves in trouble during the recession and therefore were able to survive it.”
“It is also important, however, that the property market is delivering variety. Long leases still play a crucial part in the funding of development of commercial property, even more so at this time when access to loan finance is severely rationed. The income certainty that a long lease with an upward-only rent review provides is often what funds a major retail or office development, or regeneration scheme. Some larger businesses still want a long-term commitment to a building and if the lease is long they are likely to get a corker of a deal.”
