Businesses are increasingly unwilling to commit to a long-term lease. Partner, Geraldine Fabre, considers why and whether it is a positive development.
Businesses looking to rent commercial property have always faced the dilemma between long and short term leases. Companies want flexibility and the ability to grow or downsize as their business evolves. As a result, over the last 10 years, the market has substantially changed, with short-term leases becoming increasingly common.
Are the days where the landlords had their ways of ‘negotiating’ 25-year commercial leases long gone? Is this the end of those conventional leases?
Companies with significant growth potential now have more opportunities to rent premises in the short term than ever before. There has been a steady decrease in the term length of leases, to an average of a little more than six years. This recent shift is due to a number of factors:
Shorter leases (five to six years) are easier to enter into
The formalities surrounding lease agreements were simplified in 2004, with the result that landlords are confident that they will, at the end of the term, be able to recover possession or negotiate a renewal, thereby freeing up more properties to be leased on those terms.
Commercial real estate companies face challenges from new competitors that provide dynamically configurable spaces and flexible leases. As a result, the industry has been forced to rethink its approach toward space design, lease administration, and lease duration.
Online retailing, on-demand manufacturing and innovation
These trends, most noticeable in the retail and industrial markets, require businesses to evolve in a more flexible and immediate environment (particularly in the context of Brexit).
Serviced offices and managed spaces
These types of office spaces no longer look like the shabby offices that existed in the nineties.
Businesses have learned lessons from the downturn, where some businesses went bust after a matter of months of signing conventional leases.
The Legal Complexity
The oddities of UK property law, which make it complex and expensive to understand and negotiate a 50-page long and unique lease, do not always compare well with entering into a licence to share premises, particularly for start-ups and SMEs that need space that fits their needs immediately.
Many leases now contain a break clause option that allows the tenant to terminate the lease on a rent review date. This is particularly important in a market with falling rents.
The longer the commercial property lease, the more stamp duty that is potentially payable by tenants, which increases the strain on businesses’ working capital requirements.
Most large players in the industry have accepted the notion that a modern-day business being tied to a long-term lease no longer has the enormous benefit that was once thought to be.
However, conventional leases still have their use. This is because the flexibility of short-term commercial leases also means precarity: tenants may not be able to renew their lease if they wish to stay longer.
A business, which is sufficiently established and requires control of its environment (space, layout, interior design and branding) for a period of ‘predicable growth’ of four to six years, is more likely to prefer investing in a medium to longterm commercial lease and negotiate break options.
As Apple, Facebook, Google and others take up their new homes in London, flexible arrangements are here to stay, but it is not the end of the conventional or long term commercial leases just yet.