UK commercial property lease structures: Landlord and tenant mismatch

UK commercial property lease structures have come under considerable scrutiny during the past decade since the property crash of the early 1990s. In particular, tenants complained that the system was unfair and that it has blocked business change. Government is committed, through its 2001 election manifesto, to promote flexibility and choice in the commercial property lettings market and a new voluntary Commercial Leases Code of Practice was launched in April 2002. This paper investigates whether occupiers are being offered the leases they require or whether there is a mismatch between occupier requirements and actual leases in the market. It draws together the substantial data now available on the actual terms of leases in the UK and surveys of corporate occupiers' attitude to their occupation requirements. Although the data indicated that UK leases have become shorter and more diverse since 1990, this is still not sufficient to meet the current requirements of many corporate occupiers. It is clear that the inability to manage entry and exit strategies is a major concern to occupiers. Lease length is the primary concern of tenants and a number of respondents comment on the mismatch between lease length in the UK and business planning horizons. The right to break and other problems with alienation clauses also pose serious difficulties for occupiers, thus reinforcing the mismatch. Other issues include repairing and insuring clauses and the type of review clause. There are differences in opinion between types of occupier. In particular, international corporate occupiers are significantly more concerned about the length of lease and the incidence of break clauses than national occupiers and private-sector tenants are significantly more concerned about leasing in general than public-sector occupiers. Proposed solutions by tenants are predictable and include shorter leases, more frequent breaks and relaxation of restrictions concerning alienation and other clauses. A significant number specify that they would pay more for shorter leases and other improved terms. Short leases would make many of the other terms more acceptable and this is why they are the main concern of corporate occupiers. Overall, the evidence suggests that there continues to be a gap between occupiers' lease requirements and those currently offered by the market. There are underlying structural factors that act as an inertial force on landlords and inhibit the changes which occupiers appear to want. Nevertheless, the findings raise future research questions concerning whether UK lease structures are a constraining factor on UK competitiveness.