An annual study of commercial property tenancies recently carried out by Investment Property Database (IPD) and the British Property Federation has shown that there has been a dramatic fall in the length of leases on commercial properties over the past five years.

The survey, the biggest of its kind in the United Kingdom, sourced their information from over 100,000 industrial, retail and commercial leases and found that commercial lease lengths have dropped to just 4.8 years compared to 6.2 years in 2007. That’s a drop of 1.4 years.

Leases for Small and Medium-Sized Enterprises (SMEs) are now, on average, just 4.1 years long. In 2011 just 2.1% of new leases granted for SMEs were for up to 15 years, 19.2% of new leases were for up to 10 years and 78.3% were for under five years in length.

A reduction in the length of leases was also seen by high street retail properties which were an average of 9.7 years in length back in 2007, dropping to 7.7 years and then again to the current length of 7.6 years, a difference of 2.1 years in length.

32.9% of retail leases for under five years benefit from rent free periods as do 35.5% of industrial leases of under five years which may be one of the reasons why businesses are opting for shorter lease lengths.

However, another reason for such high demand in shorter leases, without a doubt, is due to the recession and occupiers simply aren’t willing to commit to longer term leases, opting instead for the ‘stop gap’ lease until they see how the market pans out.

Chief executive of the British Property Federation, Liz Peace, was quoted in saying “In these uncertain times it’s understandable that occupiers are looking for shorter lease lengths. The long term trend has, for quite some time now, been towards shorter leases but this has been accentuated over the past 12 months by economic circumstances”.

Although we can see that the market is continuing to deliver a variety of leases, with short term for SME start-ups and longer term leases for office and retail occupiers with more certain and stable futures who wish to benefit from a good deal in return for their commitment, it is the longer lease which not only brings the security of income but also helps the industry raise much needed finance for other developments.

Long term leases are invaluable for supplying the growth and development of our economy. The challenge being posed for the industry with this current trend for shorter leases is being able to maintain that security of income which comes with a longer lease and avoiding voids.

IPD’s Senior Research Manager, Greg Mansell, stated that, due to the ‘double dip’ back in the recession, it has become an increasing struggle for landlords to let out their commercial properties and they are finding it necessary to accept shorter lease lengths to enable themselves to secure a regular, albeit short-term, income to help offset their own short-term liabilities.

In the past 4 years the average length of commercial leases has been less than 6 years in length.

The increase in shorter lease periods is prolonging the uncertainty in the investor market and, whilst shorter lease lengths do provide the landlord with the opportunity for achieving possible higher rents with future occupiers, currently this is resulting in a lack of growth in property value.

However, despite the effect shorter lease lengths are having on property values, these short term leases are enabling businesses across the board to access the market more easily and its times like these when they need that the most.

The full findings of the survey will be released tomorrow at the British Property Federation Annual Conference.

For example, if the tenant cannot afford to pay the rent, this will cause problems to the landlord who would not want their premises empty and unprofitable.

A co-operative approach

In this situation, both landlord and tenant need to look at their contractual agreement and work together to attempt to keep the lease intact. This could be done by making possible changes to the terms of the lease, to help the tenant’s business stay afloat and prevent the landlord’s building from being unoccupied.

One tip is to look at the interval at which rent is paid by the tenant. Generally, in commercial leases, the tenant will pay on a quarterly basis ahead of time. However, paying a lease in such a way can be difficult for a tenant who is short on money, and makes it easy for them to make late payments. If this clause was changed in the lease to the tenant paying rent on a monthly basis, rather than quarterly, this could make a significant impact to the tenant’s cash flow.

Another idea for the lease to be more lenient for the tenant is for the tenant to ask for a “rent holiday” to be added as a term to their lease. This term would mean that rent is halted from being paid for a specific period of time. However, the rent would be paid at a later date.

It is common for commercial leases to include terms of provisions of reviewing rent after being contracted for a certain period of time. Prior to entering the contract, parties could negotiate for the tenant to not have this clause or to enter this clause into the lease and introduce revision of rent in intervals.

Subletting

Unfortunately, although an obvious solution, it is uncommon for leases to allow their tenants to sub rent their premises and share the building with a third party. However, if there is excess space in the premises and another party is found for sharing the occupation of the building that will pay rent, this could be put forward to the landlord who should consider this as a serious possibility. If landlords do decide to go ahead with the option of sub letting, they should be careful and make sure their interests are protected.

It is important to stress that even though a lease is a binding contractual agreement, it is always possible to renegotiate the terms of the contract and alter the lease in some way. This can be done with both parties to the lease discussing it and coming to a mutual agreement. However, any changes to the lease should be documented properly in order to restrict any unwelcome outcomes. It is recommended to seek legal advice from a surveyor prior to implementing changes, as some changes could cause the current lease to terminate and a new lease to be initiated which could be difficult for the parties legally.

Although landlords and tenants of commercial properties are finding it difficult in today’s economic climate, there are solutions for both sides. The most effective is to alter the interval at which rent is paid, which is most commonly quarterly, to monthly. This could aid the tenant tremendously and the landlord would benefit from not being in possession of an empty building. Another possible solution is to sub let the building, however, this should be viewed with caution. On the whole, any changes made to the lease should be accompanied by legal advice to avoid detrimental consequences.

Colliers International’s office property team have stated that this case shows the problems of a tenant attempting to invoke a break clause as the conditions to comply with are difficult. Mike Woodliffe who is Colliers’ corporate solutions director commented on the case. He stated that the case was only about a sum of less than £200. However, other implications for both parties involved re-establish the importance of reading the fine print of any commercial lease and making sure this is understood before agreement.

More specifically, the details of the case involved a firm in Stroud who attempted to invoke a break clause, and served a notice on their landlord. However, the landlord demanded that the break clause was not valid and the notice was thus not granted. The judge, who ruled the case, was in favour of the landlord and the tenant was unable to use the break clause. The reason behind this is that a small amount of rent, which amounted to less than £200, had not been paid, even though they were not invoiced. After the break clause date, the landlord attempted to claim interest which had already fallen due. However, the judge decided that the tenant should have had knowledge that this was to be paid.

The decision of this case has the implications for the tenant of having to pay rent and other maintenance fees for five years to come. This will cost the tenant over £300,000. Although this ruling may seem excessive, it proves that each tenant should analyse their lease agreement and make sure that they are not in breach of any term, including rent payments, repairing and decorations. It should be stressed that having a break clause in a lease does not allow either party to automatically invoke it; more conditions may need to be met.

Cases similar to these require careful analysis and planning, rather than serving notice quickly on the other party. It is recommended to take legal advice in order to avoid these situations, and to make sure the lease terms are properly understood and accounted for. Even though this sort of advice may be costly, it can save significant sums in the future such as in the case above.

It is especially relevant in recent times due to the economic climate, as landlords question the validity of any break clause notice, not to lose a tenant. Although businesses are suffering, it is vital to take care with leases as not considering the fine print can cause incorrect decisions and significant future implications.

Although the judgement of the case may appear harsh on first sight, it demonstrates an important point of taking care when reading commercial leases. In addition, it is always good to be careful prior to invoking a break clause and take legal advice to ensure that the terms of the lease are complied with and the landlord is unable to scrutinise the notice served.

As landlords, it is imperative for you to ensure you have found the right tenants, as this can save a lot of hassle and grievance in the long run. The first step to take in making this happen is therefore familiarising yourself with what a specific tenant can afford in terms of a lease. Once you have established this, you will then be able to consider whether the property you have on offer is suitable for their requirements, whether the site has parking, and whether there is visible signage space. Although other factors are indeed important, the most important factor you should have at the forefront of your mind is the prospective tenant’s financial situation, and what figures they are looking at for their new lease. Once you know these figures, you will be able to put together an appealing package which the tenant can comprehend.

Although the situation outlined above describes the ideal circumstances an ideal tenant would provide, real life can thrust more unqualified tenants your way, who may not have the answers to these questions. It is therefore important that from the initial meeting you lay out what information you need from the prospective tenant, what their expectations are and what they are looking for, so you can adjust your own requirements accordingly.

One of the ways you can ensure that you ask all the right questions is by creating a checklist before your first meeting, so that you are clear in your mind exactly what you need to know from the prospective tenant. It will also ensure that you do not forget to ask something you wanted to during the meeting.

The next step to consider is the prospective tenant’s credit history. You should inform them that you want them to personally be on the lease. Many restaurant owners are opposed to this, but it is more advantageous for you, as you will be able to see their full credit history, rather than having to deal with a company being on the lease which has virtually no operating credit history (particularly if it is a new start-up).

The third step is to conduct a thorough background check on the prospective client and their company. If this comes back all clear, this is usually a good sign that you will be less likely to encounter difficulties in the future.

The fourth step should normally be checking whether the tenant has had a feasibility study conducted. This will measure the feasibility of the new business, and whether it is likely to succeed. A way of encouraging prospective tenants could be to offer to split the costs of such a study should they not have already had one done.

The fifth step would be to offer to include the costs of a business plan in a long-term lease. Not many landlords do this, and it could go a long way in securing loyalty from your tenant. It will also encourage a relationship of trust and professionalism. This step will obviously not apply if the prospective tenant already has a business step.

One of the final steps you should consider as a landlord is checking whether the prospective tenant has a business team in place to begin the operation of setting up the restaurant. If no such team exists by the time the restaurant is beginning to be set up, this should be of some concern to you, as it may suggest the tenant does not really know what he is doing, and is unlikely to be successful.

This trend has been documented by the British Property Federation’s Annual Lease Review, with a separate study having been conducted by the Investment Property Databank.

Mary Portas conducted a review of the high street, examining commercial tenancies across a number of high street units. The survey included restaurants, bars, clubs, retail units and pubs.

Interestingly it was found that the number of commercial leases with break clauses increased to 31.1% between 2009 and 2011. This has been an increase from 29.4%. It seems that an increase in break clauses has added to the flexibility of the commercial leases, as it provides tenants with more flexible options when it comes to breaking out from their leases. Prospective tenants will therefore feel more comfortable entering into commercial leases if they feel they have adequate break clauses incorporated in them.

After two years that saw a decline in the length of leases, this year has seen the average length of leases actually increase. Rent has also fallen by 37%. This could be another factor which has resulted in greater flexibility of commercial leases.

As the economic climate has become more volatile and unstable, it is important that commercial leases respond by becoming increasingly flexible and adaptable to the market conditions. If commercial leases do not adapt to market conditions, they will experience a slump in terms of new leases being taken out, and current ones being renewed. This will not only have a negative impact on the landlords of these properties, but will also severely affect the UK economy. This is because if retail units, pubs, bars, restaurants and the like cannot afford to maintain their commercial leases, they will soon be put out of business.

High street stores and units are struggling as it is in order to battle to survive in what has become a fiercely competitive and unstable market. If commercial leases did not become flexible, and enable these places to negotiate agreeable terms they can work with, this would be an added pressure on businesses which are already experiencing the difficulties of staying afloat in this climate.

The new flexibility of commercial leases can be attributed to a change in landlords’ approaches to their properties. If they do not become more adaptable, they too will lose out on rent, when businesses can no longer afford to pay their overheads. As has been witnessed, one of the ways landlords have made commercial leases more flexible is through the use of break clauses in the leases themselves.

Another way they have been able to add to commercial leases’ flexibility is by providing substantial rent-free periods for the properties. This is particularly useful for new businesses and units who are attempting to start-up and run a successful business, as they have one less cost to worry about in the initial start-up period. An additional method landlords have used to retain the flexibility of commercial leases is by ensuring that they offer a variety in their leases. Landlords are now offering greater scope for negotiation, and renegotiation of current leases that are up for renewal, so they can truly tailor leases to individual businesses’ needs.

Tip #1: Check Whether Your Tenant Receives Local Housing Allowance

If your tenant receives Local Housing Allowance, this sum is normally not payable directly to landlords. The only exception to this rule is where the tenant can be classed as ‘vulnerable’. If you believe you may have a tenant which falls within this category, it is advisable to contact the benefit office in order to find out what your next step is.

Tip #2: See if it’s Possible for the Tenant to Appoint a Third Party to Pay you the Local Housing Allowance

If your tenant is indeed receiving Local Housing Allowance, you may be able to receive the money by asking the tenant to appoint a third party who will receive the money instead of the tenant. They can then pay this directly to you. This rule is laid down in regulation. It is possible for Local Credit Unions to carry out this procedure.

Tip #3: Getting a Tenant’s Housing Benefit/Local Housing Allowance When They Refuse to Pay it

If your tenant has been in arrears for 8 weeks or more, it is possible for you to apply to the benefit office in order to request that the payment is now made directly to you.

Tip #4: Ensure you have the Right Insurance Policy Coverage

Some property insurance policies exclude cover for landlords whose tenants are on benefits. It is therefore important to ensure that your policy does not say this, as any insurance you may need to claim in the future will be void.

Tip #5: Always Be on Good Terms with the Benefit Office

It is important to ensure you co-operate with the benefit office. Failure to do so will cause delay in your payments being made.

Tip #6: Attempt to Get your Tenant to Give you a Letter of Authorisation

A signed letter of authorisation to the benefit office will allow the benefit office to discuss their application directly with you. If you do not do this, it is unlikely the benefit office will be able to discuss your tenant’s application with you, as their information will be protected by the Data Protection Act.

Tip #7: Remember a Tenant’s Benefit will be Proportionate to the Size of their Family

When looking for prospective tenants, it is important to remember that despite the size of the property the tenant wants, they will only be receiving benefits in proportion to the size of the property which is suitable for the applicant, taking into consideration the area the property is located in.

Tip #8: If The Property you Own is HMO, ensure Each Unit is Identifiable

Ensuring that each individual unit in your property is identifiable will prevent issues with the benefit office (such as them believing double benefit is being claimed for one unit).

Tip #9: Ensure Applications are Made on Time

If you secured a new tenant, make sure their application is sent off well before they are due to move in, as it is not possible to backdate benefit payments.

Tip #10: Keep All the Original Documents

The benefit office may need to see original documents, such as tenancy agreements, so it is important to make sure your tenants have these. You should also make sure you have copies for your own records.

Local Councils and Empty Properties: the Legal Position

The Councils enjoy certain rights in relation to empty properties. The Empty Dwelling Management Order was implemented as a part of the Housing Act 2004. The Order provides councils with a discretionary right to take over the management of long term privately owned unoccupied properties. The main rationale behind this power is to enable the councils to make use of the unoccupied houses and prevent certain negatives effects of abandoned dwellings including negative impact on the quality of live in surrounding areas and attraction of vandalism.

To obtain an Empty Dwelling Management Order a local authority must make an application to the Residential Property Tribunal. Before approving the EDMO, the Residential Property Tribunal has to look at a number of different factors such as whether a particular property has not been used for more than 2 years and whether or not it is being vandalised and used for anti-social purposes.

It is also important to note that there are a number of significant exemptions. The exempt properties include holiday homes, properties being sold or let, and properties that are partly occupied.

The councils have also got at their disposal compulsory purchase orders (under s17 of the Housing Act 1985) and enforced sale procedures (s103 of the Property Act 1925). The first one gives councils the power to compel the owner to sell the property to the council. The latter enables the council to force the owner to put the property on sale in an open market.

Squatters and Adverse Possession

Firstly, let us discuss the concept of adverse possession. Adverse possession is a legal process by which real property can change ownership through extended physical occupation/possession. Title to the property can be changed against the current legal owner’s will and without any compensation for him if the possession is apparent and not interfered with by the current legal owner for a certain period of time. Consequences of the doctrine of adverse possession have been minimised by introduction of compulsory land registration in England and Wales. Nonetheless, it is still possible for the title of the landowner to be entirely extinguished once the relevant time has passed. What is particularly important to remember is that the adverse possession must not be disguised in any way it must be open and apparent and involve use of the land as if it was the adverse occupier’s own land.

Squatting is a form of adverse possession. A squatter is a person who occupies an empty or abandoned property without the rightful owner’s permission and frequently without even him knowing about it. Under the current legal regime, genuine and peaceful squatters cannot be removed without a court order. If you find squatters in your property you should act quickly as it may be costly to remove them through formal legal route. Ideally, you should try to peacefully convince them to leave your premises. Please also remember that you owe a duty of care towards their personal possessions so you should not try to remove anything without their consent. Finally, if you are forced to go through the judicial system you should in the first place apply for an Interim Possession Order. This must be done within 28 days of finding about the squatters.

Vandals may be forced out of the property under the Criminal Justice and Public Order Act 1994.

Nevertheless, a landlord must provide his decision to the tenant in writing regardless of whether he gives consent, withholds consents or what conditions have to be satisfied in order for him to provide consent.

In leases where assignment or subletting is permitted, it is important that the landlord deals with a tenants request in good time. Failure to do so could not only be deemed as a breach of the terms of the lease, but if the landlord has a reasonable reason to refuse it may be too late for him to rely upon it.

Of course there may be circumstances where it is reasonable for the landlord to delay his decision. This may be because the tenant has not satisfactorily provided the landlord with all the required information in order to make an informed decision, such as the proposed tenant’s financial information (e.g. the last two or three years accounts) and references from previous landlords, their accountant or their bank. But once this information has been provided the landlord should act swiftly or risk the tenant acting without his consent and if the matter goes to court, risk further financial penalties which could be imposed by the court in addition to legal costs. These penalties could be exemplary damages in addition to compensating the tenant for his loss which is likely to be as a result of the proposed tenant pulling out of the transaction due to a landlord’s delay.

It is difficult to be certain about what will be considered a reasonable amount of time for the landlord to provide his decision to assignment or subletting. However, the clock begins ticking from the moment the tenant provides the landlord with the notice or application and all the required supporting documentation. A prudent landlord should in reality be able to make this decision within two or three weeks, depending on the complexity of the application.

In any event, whether you are a landlord or a tenant, if you are not sure about the time periods or feel that one party is unreasonably delaying matters then you should consider obtaining legal advice from a commercial property solicitor.

The accelerated possession procedure is a fast track procedure available to a landlord to repossess their property and evict the tenant under an assured shorthold tenancy. This type of claim has 3 very important aspects :-

• The landlord must have given the right notice before starting a claim and it must be exactly compliant with the Housing Act rules
• No claim for unpaid rent or other financial claim can be made
• It will still take about 6 weeks after getting an order under the so-called accelerated procedure and even then, some tenants do not leave without attendance by bailiffs

The accelerated possession procedure is only applicable to assured shorthold tenancies which can be described as a residential tenancy with limited security of tenure (the right given to a tenant to continue occupancy of a property following the end of their tenancy).

A landlord who has granted an individual an assured shorthold tenancy has the right to acquire repossession any time after the fixed term lease (a tenancy granted for a specified length of time) has run out or during a periodic tenancy (a lease granted where the period is specified but rolls over for example month to month). The landlord is not required to provide grounds for repossession and may apply under the accelerated possession procedure.

Criteria

The following criteria must be satisfied in order for a landlord to make a claim of accelerated possession procedure and be successful in it:

• The landlord should not be a local authority or housing association but a private landlord
• Tenancy must have begun after 15 January 1989
• A written assured shorthold tenancy exists with the tenant and any other agreement of tenancy prior to that be same
• The landlord must serve a notice on the tenant providing details of their address
• If the tenancy was one between the dates of 15 January 1989 and 28 February 1997, the landlord should have served at the time a notice on the tenant informing them that the tenancy is an assured shorthold tenancy.
• Deposits received after 6 April 2007 is paid into a tenancy deposit scheme (used to protect the deposit) approved by the Government.
• If the property is a house occupied by several tenants or is located in an area where the local authority requirement a licence, the said licence has already been obtained or been applied for
• The tenant should have been in occupancy for a minimum of 6 months
• The fixed term tenancy has ended or the tenancy is a periodic tenancy.

Procedure

The Housing Act 1988 requires the landlord to serve two month’s notice on the tenant stating that they vacate the property and that he wishes to repossess after the tenancy has ended. Without this notice, the landlord runs the risk of committing a criminal offence. If the tenant fails to leave before the expiration date of the notice, an application to the County Court for an order requiring the tenant to vacate the property can be made.

In reality the tenant is likely to have stopped rent in particular during the two-month notice period. This however does not entitle the landlord to ask for a judgment of money from the courts even if he is out of pocket for two months arrears or more. The option here is to issue legal proceedings for arrears separately. Unfortunately this would involve further expenses and time.

When filing the application to the court it is necessary to attach copy of the Section 21 notice, evidence that the notice was served and the Assured Shorthold Tenancy Agreement. If the paperwork is all in order, the court will make an order for possession and a court hearing would not be a necessity. It is to be noted however that a technical error or mistake made in the notice, procedure or other documentation can result in the court striking out the claim meaning the whole procedure would have to be restarted.

The court application will then be served on the tenant giving them 14 days to either accept the claim or dispute it and file a defence. As already mentioned if the case is well founded, a defence would not be available, irrelevant of whether the tenant’s complain is sincere and genuine.

The accelerated possession procedure allows the landlord to bypass a costly and lengthy hearing to evict a tenant. This is of course dependent on the right paperwork being filed. If the tenant still refuses to leave the property within the given time frame (usually 14 days) after an order has been sought, the landlord can apply to the court for a warrant of bailiffs to evict the tenant on their behalf. The tenant however, can apply to court to delay their eviction justified by grounds of exceptional hardship. If this is accepted by the courts, the eviction period would be extended to a further 6 weeks.

Why it’s important the freeholder complies

The freeholder or landlord of the building has a set of responsibilities to both the property in question and the leaseholders residing within the building. These responsibilities include enforcing the obligations stated in the lease on all leaseholders living in the property, arranging the buildings insurance, the upkeep and maintenance of the communal areas in the property and the communal grounds and generally ensuring the smooth running of the property.

When the landlord cannot be contacted or has quite literally ‘done a bunk’ these responsibilities are then left unchecked. In many cases the leaseholders within the property will join forces and take over those responsibilities by maintaining the building themselves and keeping the insurance payments up to date.

Absentee freeholder and mortgage problems for a buyer

Many mortgage lenders simply aren’t willing to lend on leasehold properties where there is an absentee freeholder thus making it incredibly difficult for the leaseholder to market their property.

On occasion the lender may be swayed to lend if the leaseholders have absentee freeholder/landlord indemnity insurance in place but, more often than not, a refusal is something which the leaseholder should come to expect.

Not so long ago lenders wouldn’t have batted an eyelid at lending on a property with an absentee landlord, especially where indemnity insurance was in place and the leaseholders appeared to be working together to maintain the property to a good standard, in fact an absentee freeholder was a technically which was by and large ignored. However, the shift in the climate has turned this entire scenario on its head and belts are being tightened, albeit maybe a little too tightly.

Mortgage lenders like easily marketable properties, naturally if they lend on a property and the owner defaults on their mortgage payments the lender needs to know that, once the property has been repossessed, it will re-sell relatively quickly. The marketability of a leasehold property with an absentee freeholder or landlord is a big problem for lenders for several reasons.

Problems due to absent freeholder

Firstly, with no landlord in place there is no one to enforce the obligations within the lease on the other leaseholders; there is no guarantee that the property will be maintained and there is certainly no guarantee that, when the property is sold on again it will still maintain its value. These aspects significantly reduce the scope for which the property can be marketed making it a high risk move which, in our current economic climate, lenders aren’t willing to take and sadly, with the tightening up of their conveyancing requirements, it looks as though even more lenders will be set to refuse lending on leasehold properties with absentee freeholders.

Last resort – going to court

It may well be possible for the leaseholder to purchase the freehold from the absentee landlord but this doesn’t always prove to be an easy task. The leaseholder will first have to apply for a vesting order. The vesting order doesn’t mean that the freehold title will automatically be transferred to the leaseholder; there are a number of actions which will need to be taken first before that can happen.

The leaseholder will need to try and track down the freeholder and send a formal notice asking him to confirm his correct address details. In many cases this may not be possible but it is a step which must be shown to have been taken.

The leaseholder applying for the freehold title will also need to ensure that all other leaseholders within the property are in agreement with the decision. This may prove a problem too, especially if some freeholders have been more than happy to plod along without taking any responsibility for the building.

However, if the other leaseholders are in agreement the leaseholder applying for the freehold can then put in an application to the land registry for a copy of the freehold title. It will then be down to the court to decide the value of the freehold and the leaseholder will need to calculate whether this is actually financially viable.

If successful the title will then be transferred to the leaseholder who will then take on the responsibility of freeholder.