Posted 25 February, 2014 OBI BLOG
Long-term leases are almost a thing of the past. The 1980s saw occupiers committing to 25-year leases – the early 1990’s saw lease lengths being reduced to 15 years and the 2000s saw it drop again to ten years. The past five years have seen this drop even further to an average of 4.8 years. This blog will explore the advantages and disadvantages of short term leases from an occupier’s perspective.
So why have we seen these changes in leasing patterns?
The main reason is economic uncertainty. Occupiers, especially start-up SMEs, are cautious of committing to long-term leases as they do not want to expose their businesses to risk. Instead, they want the option to be able to exit their lease if the workspace is no longer suitable. This could be due to business expansion, contraction or change in location.
Another reason for committing to a short term lease is the reduction in Stamp Duty Land Tax payable. For example, if an occupier was to sign up to a ten-year lease, paying an annual rent of £125,000 plus VAT, then the Stamp Duty Land Tax payable would be £8,294 plus VAT. However if the occupier was to commit to a five-year lease then the duty payable would be just £3,539 plus VAT. That said, the rental concession gained from committing to a longer lease would counteract the higher Stamp Duty Land Tax payable by a considerable amount. Further benefits include the certainty of occupying an affordable office for a fixed period of time.
So why are landlords granting short term leases?
Weaker occupier demand over recent years has seen landlords caving in to break clauses. They have struggled to let their space and want to avoid holding costs, such as service charge and business rates liabilities. However, shorter leases mean the value of their investment decreases. Furthermore, they are not guaranteed a rental income upon lease expiry – 60% of expiring leases fall vacant for three months or longer, whilst 32% of tenants renew at the end of their lease and just 8% re-let after the previous tenant has vacated IPD Report.
So, what are the risks to your business when signing a short term lease?
It is common practice for leases to expire without a new one being in place which is far from ideal. Tenants need to be organised and make sure that they are protected (i.e. within the Landlord and Tenant 1954 Act) upon lease expiry otherwise this can have disastrous consequences for your business.
Looking to the future, the back of 2013 and the beginning of 2014 have seen a continued improvement within the UK’s economy. This will impact positively on the property market and will provide occupiers with the confidence to sign up to longer leases. There are signs that this confidence is starting to filter through already. It is an important decision when deciding on how long a lease to commit to. As an occupier you want to maximise the level of concession without prejudicing or restricting the future success of your business.
What are your experiences with lease lengths? Have you been party to any nightmare scenarios or are you in need of any advice? If so, OBI is extremely active in representing occupiers on business relocation and we would be delightful to help your business explore it’s options.
Emma Powell works within the OBI Property Offices department if you would like any more information then please do not hesitate to contact the office.