Four out of five SMEs to dodge rent review

Nia Williams

August 27, 2010

An independent analysis of 91,000 tenancies published today shows that small businesses are increasingly signing shorter deals, with 81% on leases of five years or fewer and therefore unlikely to face a rent review. By comparison just over 3% of small businesses have a lease of over 10 years.

The thirteenth edition of the BPF/IPD Annual Lease Review also shows that 2009/10 was a significant year for rent free periods and break clauses as landlords and occupiers grappled with poor economic conditions. The move towards shorter leases, however, has been constant over a period of more than 10 years now also illustrating significant long-term change in the commercial property market and our economy.

The largest study of its kind ever completed, the data shows that a quiet revolution has been taking place in leasing practice since the early 1990s, when the vast majority of leases were what was called ‘institutional’, typically for 20 or 25 years, and often containing upward only rent reviews.

This data shows that the average lease length fell from 5.9 years in 2008/09 to 5.0 years in 2009/10. Lease lengths have therefore basically halved in the period since the Conservative Party last formed a Government in the 1990s.

Other statistics show that:

  • Lease lengths for retail (5.4), office (4.7), and industrial property (4.0) have come down substantially over the past year from figures of 6.5, 5.4, and 4.6 respectively.
  • The average lease length for an SME was 4.1 years. The average lease length for a large company was 6.6 years.
  • Taking account of all sizes of business, 72% of new leases in 2009/10 were for five years or less, and 90% for 10 years or less.
  • The proportion of leases with a break clause increased to 29.4% in 2009/10, compared to 28.2% in 2008/09.
  • In new leases there was plenty of scope to negotiate a long period of ‘free’ occupation. The average rent free period in 2009/2010 was 10 months, with the average in the office market, 14.5 months.

Liz Peace, chief executive of the British Property Federation, said: “Leases have changed significantly over the past two decades with profound implications for landlords and tenants.

“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.

“You could say the last year has been an ‘occupiers market’, but actually the revolution in lease terms has been taking place quietly over the last two decades and the last year just reinforces that.”

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