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Longer commercial leases a sign of growing occupier confidence

The average length of new commercial leases has increased during 2015, suggesting a
greater confidence amongst tenants in the economic recovery.

This is the conclusion of a study prepared by MCSI in association with agents Strutt & Parker and the British Property Federation.

The study found that the average commercial lease term during the first half of 2015 was
7.2 years, based on the total number of leases granted in the UK.

This shows a further lengthening for the fourth consecutive year, and is seen as an
indication that business tenants are increasingly confident in the stronger economic position of the country.

Larger tenants, especially in the retail sector, are more willing to opt for longer lease terms.

However a high proportion of new commercial leases are still for a term of five years or less.

More commercial tenants are renewing business leases

Another sign of the economic recovery is that an increasing proportion of tenants are
choosing to renew commercial leases on expiry. This suggests that the market is beginning to experience more normalised conditions.

The research shows that landlords are keen to avoid vacant space and were offering occupiers better deals to avoid the risk of empty properties. Over 70% of tenants who had a right to break their lease in 2014 chose to stay in the same place rather than move.

This rose to 80% for the retail sector with tenants keen to protect an established pitch in a market where rents are generally rising.

“Commercial property a strong indicat or of business sentiment”

Colm Lauder, Senior Associate at MSCI, said: “As a barometer for the wider economy, commercial property is a strong indicator of business sentiment. Improved demand for retail space reflects greater consumer spending while demand for office space highlights growth in the services sector.”

Ian Fletcher, Director of Policy at the British Property Federation, said: “For many occupiers, their leases will still involve flexibility, such as a shorter lease and the ability to break, even if not exercised. Signs of rental growth are leading some occupiers to lock into longer leases, or to shop around for a good deal. It could be said that the occupational market has returned to normal, but it is a new normal that reflects the pace and uncertainties of modern business.”

The length of lease must always be an important consideration for business tenants when taking on commercial premises, whether for the first time or on a renewal of an existing lease.

When trading conditions are perceived to be strong and likely to remain that way tenants will naturally be more willing to commit themselves to longer leases.

Landlords are usually happy to grant longer leases, especially to established tenants, since they will feel assured of a guaranteed rental income.

Tenants should consider the benefits of a break clause

While a tenant may be confident in agreeing a longer-term lease they should ask whether the landlord is prepared to agree a break clause, allowing the tenant to terminate the lease should conditions deteriorate.

Tenants must be aware that break clauses are not always an easy get-out from a lease. Landlords usually insist upon a break notice being served exactly in accordance with the provisions of the lease. Rent must usually be paid up to date before a notice will be accepted, and service charges may also have to be paid up to date.

A tenant intending to vacate premises after serving a break notice can also expect to receive a schedule of dilapidations, together with a demand for payment of the amount required to re-instate the premises.

If the lease is to contain an upwards-only rent review clause then it is particularly important that a break clause is included which the tenant can exercise following a review.

Tenants often found themselves in difficulties when stuck with a lease where the rent remained at pre-crash levels despite falling trade and the landlord refused to re-negotiate a lower rent. In such circumstances many tenants defaulted on the rent and were forced into bankruptcy or receivership.

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