The impact of the economic recession on property is causing changes in the traditions we have become used to over the last decade – but this is not unusual.
When I started as a trainee surveyor in the mid-1960s, inflation had not started and it was common practice to grant leases for 21 years without review. By my first recession in the early 1970s, inflation was having an impact and seven yearly reviews were common.
Today, RICS research has shown that leases for commercial properties have decreased to just over four years. Landlords have struggled in the past few years of low demand and plentiful supply, offering rent free incentives or capital contributions to fitting out to keep the headline level of rent as high as possible.
These incentives mean to attract tenants to take the space and, with bigger incentives, to take longer leases. The higher the rent and the longer the lease the better the capital value of the investment and more attractive it is to potential buyers.
But shorter leases have an impact on landlords, which is not often considered – but welcomed by tenants. Unless there has been express provision made in a shorter lease, landlords could end up having to pay for costs of many items that would have fallen on the tenants to pay through longer leases in the past.
Shorter leases mean that where the landlord has major repairs or renewals, the tenant may secure a “cap on the liability either directly or through the service charge’” Where there is no cap, the tenant could threaten to vacate at the end of the three-year or five-year lease, leaving the landlord at risk of paying for the work and having to find a new tenant. In addition, there are the holding costs of an empty building which after three months vacancy attracts Empty Property Rates and this can be substantial.
This might be avoided if the lease provisions include a sinking or reserve fund that the tenant pays, rather than a higher rent.
But such innovative thinking is rare indeed.
The case law relating to service charges imposed on tenants in multi-occupied buildings, which puts the tenant in a position of having an indirect full repairing liability, is strewn with disputes. Here, landlords have unsuccessfully attempted to obtain payment for renewals or improvements of major works, such as roof coverings, plant and equipment for heating, air conditioning and lifts as a few examples. There are other examples where the landlord has tried to rush through the payment for major works just prior to the expiry of the lease and failed.
With such uncertainty, the imposition of a full repairing lease upon the tenant, where the rent paid has been reduced to have regard to the liability for such onerous obligations, is not as beneficial as may be seen at first glance. Is the day of the full repairing lease coming to an end with higher and more inclusive rents being paid?
:: Kevan Carrick is a partner at JK Property Consultants LLP, the policy spokesman for RICS North East, and member of both G9 and the NE LEP Investment Fund Panel.