Market downturn impacts on lease lengths

Landlords are negotiating shorter leases with retailers and other commercial tenants in response to tighter market conditions over the last year, a new research report issued on Monday indicates.

In their tenth Annual Lease Review, the British Property Federation and the Investment Property Databank said that the trend towards shorter, more flexible leases reflects the downturn across the property sector. But the trend is forecast to boost confidence in the industry's ability to provide tenants with the terms they need and adapt to changing market conditions. The average length of a lease fell from 6.2 to just 5.7 years over the last year, as tenants have sought greater flexibility.

Retail leases experienced the biggest decline with a drop of from 7.8 years to 7 years, while office leases fell from an average of 5.7 to 5.2 years. Industrial remained unchanged at the previous year's level of 4.2 years. Shorter leases have become more frequent: of all leases granted in the UK last year, 67% were for five years or less. Less than 3% of leases agreed in 2006/07 were for more than 15 years, although these leases accounted for 15% of the total rent passing - fitting the pattern that units with larger rents sign longer leases.

While leases have shortened, the average first period to break on all property where the lease contained a break, was 6.3 years compared with 5.4 years in 2002. In 2002, 26.6% of leases had first break and rent review on the same date, whereas in 2006/07 the proportion was just 9.3%. The same trend can be seen across all sectors. This indicates that break clauses are becoming more effective.

'Tighter market conditions experienced by the retail sector over the last year seem to be reinforcing the longer term trend across all sectors for shorter leases. Whatever the cause, in these uncertain times what is important is that the property market is offering a choice of duration of leases that reflects the needs of its customers. Of course, this downward trend cannot continue forever but I have no doubt that the practice of providing choice to potential tenants will continue and that is what is important’, said Liz Peace, CEO of the BPF.

The tenth edition of the BPF/IPD Annual Lease Review draws from detailed evidence of 75,000 tenancies, encompassing a full analysis of lease lengths, break clauses, review cycles, rent free periods and income profiles. It incorporates the 9,580 new leases granted between January 2006 and March 2007.

The full report is available on the BPF website. Click on the link below to read it now. (Scroll down to the bottom of the page)