How have the terms in English commercial leases adapted in the last few years – ‘The Terms’

I commented in my first article about how I’ve noticed how the content and structure of lease terms are changing. I must again stress, my observations below are based on the last ten years and are not necessarily a result of the pandemic and the cost of living and energy crisis we are currently experiencing. I imagine if I revisit my thoughts in a few years’ time the picture will have changed again.

Term

I remember at my first job after leaving university hearing two senior partners commenting that they were getting old. They had agreed on a lease for a term of 25 years, and it was finally coming to an end. For the leases I look at today, a 10-year term is unusual in its length, 3 to 5 years are much more common. The only ones where longer terms seem to be used are where there is a large capital outlay at the start of the lease.

Outside 1954 Act

Probably as a reflection of the reduction in term, I am seeing a large proportion of the leases I look at are contracted outside of the 1954 Act. It does make me wonder that whilst The Act, and its subsequent amendments, is still a cornerstone of landlord and tenant relations whether it is losing its previously won regal status. It seems landlords and tenants no longer feel the need for its protection. Mind you she is almost 70 years old.

Rent Free

Frankly, if a lease I have read recently doesn’t have a rent-free in it either one of the parties didn’t ask or the other was in such a strong position they said no and there was no comeback. With smaller rents, one to three months at the start of the lease is common. For larger rents on a longer term, a rent-free of 6 months to a year is not unknown. Leases also seem to contain more stepped rents and ones that are indexed linked. I do fear for those on the latter as we see inflation rising.

Breaks

Mid-term and even multiple mid-term breaks are becoming the norm in more and more leases I am looking at. The breaks are also being linked, either to an additional rent-free, or, which sometimes surprises me, a financial penalty paid to the landlord if the tenant initiates the action. What’s becoming apparent is that breaks are being utilized in leases with relatively short terms and are almost mainstream in ‘long’ terms which I have already commented may be no more than ten years.

Service Charge Caps

I think occupiers are becoming savvier when they deal with the issue of service charges. With all due respect to landlords and their agents, I think they monitor budgets closely to give value for money and good services to occupiers

In the past, a cap was normally reserved for a big, known capital event that the tenant had been made aware of during their pre-contract enquiries. This may be a planned external redecoration or refurbishment project and the cap was limiting the tenants' exposure specifically to that. More often I am seeing the cap now applies to the overall annual service charge spend and it being reviewed annually on an indexed basis.

In my final article of this series, I’ll make a few more final observations and comments about the trends I am noticing.