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.
How have the terms in English commercial leases adapted in the last few years?
For those who have read my previous articles on improving the navigation of modern commercial and residential leases, thank you and yes, I know, I should get out more. In those articles, I’ve tried to argue that modern leases need to be ‘refreshed’ rather than overhauled to make them a more user-friendly document and more akin to the technology available today. I’m not saying we will ever necessarily have a standard lease template as there are always going to be different clauses inserted or removed as both parties negotiate them.
As I wrote the articles it got me thinking about how much leases and the clauses therein have changed in the last 30 years since I started life as a management surveyor. The structure and layout have changed for the better in my opinion, but it is also interesting to note how clauses to limit the tenants' exposure are becoming more common and in fact, occupiers seem to be in a much better place to negotiate to their benefit.
Obviously, the comments I make are based on my own experience and do not reflect a view across the whole property sector. I do not profess to be a property market analyst by any means, but I do think I am exposed to enough documentation to share a view. I would also stress that the documents I address tend to be at the sharper end of the property world; smaller mixed-use buildings, secondary shopping centres, and single occupancy tenants, rather than the prime institutional lettings where I imagine the picture may be similar but on a different scale.
Do Commercial Leases Have to Be So Complex?
Over the past 30 years in my role as a Chartered Surveyor, I have read thousands of English residential and commercial leases and property-related documents. The thing that always strikes me is that despite hundreds of years of developing a modern lease and the terms contained therein, for the layman, and even myself, some of them are still insanely difficult to navigate.
Please don’t get me wrong, I appreciate that the terms, which have been built up over the last millennium, need to be incorporated into a lease and are paramount to its effectiveness in protecting both the Landlord and the Tenant. I am not suggesting we sanitise something that has been built up after years of case law, but rather that we evaluate and steer a path toward a more user-friendly document where key terms are easy to identify, and the lease is only ever referred to when a more complex dispute arises.
The most critical issue right now is that modern leases have been built up over time by various legal practices that then add and amend their own generic documents. The same format is used as the lease evolves into something that has withstood the test of time. As a result, the layout never changes. New clauses, such as the 'Pandemic Protection' clauses, which I see more and more are inserted in separate parts of the lease depending on the existing layout and the whim of the person drafting it. I believe it is a case of "if it isn't broken, don't fix it" Why should we, after all?
In my time reading leases there have been changes and they have considerably improved since the dark days of the ’70s and ’80s. In those days the lease read like a single paragraph, and if you lost your place, it was back to the beginning assuming you could focus on it for that long. Indexes have appeared at the start to make life easier, but this is seldom the case with all leases. Headings have appeared, to back up the indexes, and in general, this makes navigation easier, but again this is rarely the case across the industry.
I believe some minor improvements could be made to make the modern lease a more user-friendly document, without detracting from the required core clauses. The Law Society Lease was an admirable attempt to make life easier, but perhaps we need to adapt our approach as we draft new leases in the future.
Whilst the terms of a lease are paramount in their effectiveness to protect the rights of the landlord and tenant, they are often unnecessarily complex to navigate due to the different ways their drafting has evolved. In my time reading a substantial number of documents, 99% of which are electronic versions, I have come across certain layouts that are frustrating, to say the least.
Here are some examples;
The Pinball
This is maddening to the extreme. The lease starts with a menu of definitions on the first few pages of the lease. It then leads you deep into the document and you come across a term that needs defining, for example, the Term Start Date. Rather than stating the Term Start Date there and then, it will say something like, ‘as defined in the Rent Start Date.' The reader is taken back to the start of the lease only to find that the definition of the rent start is defined as ‘The Contractual Start Date’ and we are taken even farther back until we ultimately find the definition we need. How can this make sense?
The Indecipherable
You’ve just spent a few thousand pounds in getting your lease drawn up, and finally, just before completion, your representatives include the all-important dates by hand. These include the date of the lease, the rent start date, and perhaps some handwritten break or rent review dates. A few months later you refer to your lease to check the rent commencement date which is defined as ‘the term commencement date. And then you get this, is it a 5, a 9 or even a 0?
Why are some leases covered in crossings out, scribbles and often unreadable writing when we have word processing and a dry signature having the same weight in law as a wet one?
The ‘Why’?!
If we asked 1,000 landlords and 1,000 tenants what they considered to be the most important clauses within a lease, I doubt it would be a definition of ‘arbitration.’And yet this can appear before any mention of the financial implications on the landlord and tenant. Indulge me if I am out of turn, but I would suggest the ‘rents’ are what is typically on most people’s minds. I recently read a lease where the rent appeared on page 36 of a 45-page document. WHY?
The Weighty Tome.
I occasionally open an electronic document and discover it has more than 65 pages. My experience has taught me that there may be a Schedule of Conditions annexed to the lease which I can ignore. The lease grows longer and longer as I scroll down, and it turns out that it has taken 65 pages to cover what would ordinarily take 32.
These are just a few examples but highlight the different ways leases are being drafted whilst all trying to offer the same protections as each other.
I want to stress, that I appreciate that not all leases are the same and that my views are based on English Commercial leases. They vary for a number of reasons depending perhaps on whether they refer to a retail unit, an office, 100m2 of space or 10,000 m2 of space - the reasons are endless. They are all drafted to meet the needs of the parties who will rely on them in the future and by their nature will be different.
I also appreciate that some of the leases I read are easier to navigate than others and in general the older the lease the more likely it is to be difficult to pick your way through it. More and more leases contain an index (some entirely overly populated), and there has been the introduction of Prescribed Clauses and generally a better layout of definitions. They are getting more straightforward.
I do however think we could take some modest little steps as we draft new leases, to make them more akin to the 21st Century. Clearly, it will take time as older lease leases come to an end but why not consider a few slight changes?
Layout
I appreciate why the layout of a lease has not changed in the past, as they used to be paper documents that were extremely difficult to edit or amend. Today, we can move the layout around with ease. Why can’t we agree to a more standard layout of the lease, which puts 'important' clauses (rents, review provisions, breaks, etc.) for the landlord and tenant, in a more prominent and perhaps, more importantly, logical order? Why do I find a rent provision on page 36 of a lease, behind the clause that protects the landlord from the tenant putting too much weight on a ground-floor retail unit with no basement? Surely it would make sense to put related clauses together, why do we find the penalty interest clause randomly placed toward the end of a document albeit that it specifically relates to a clause that defines rent? Why are they not together?
A Map
Why can’t we have a simple page or two after the front cover of the lease which lists in a straightforward manner the core elements of the lease? The term, the rent, the rent start date, the service charge date, the rent review dates, break dates, etc. Why can't we do away with the 'definition ping pong' where we are bounced around the lease looking for definitions? These are simple things that would make the document easy to access. Needless to say, for example, if you need to look into the rent review provisions in more detail, you will have to refer to the entire clause.
I am sure there are some reading this who will think my thoughts are trivial, unnecessary and frankly an excuse to create more work for a system that works fine at the moment. It’s a reasonable point. But we are now living in a world where the quill, ballpoint pen, the typewriter are no longer used and can implement changes, after the initial pain, easily. The lease has evolved but not in a structured, logical and layman-friendly, way.
I could hide and say it would up to the individual to decide what is important but why don’t I have a stab? Below is not definitive but we have to start somewhere.
Lease Date:
Type of Lease/Licence:
Landlord:
Landlord Address Company Number:
Tenant:
Tenant Address Company Number:
Demised Premises:
Outside 1954 Act:
Term Commencement Date:
Term End Date:
Length Of Term:
Rent Commencement Date:
Initial Rent:
Rent-Free Period:
Service Charge Commencement Date:
Rent Review Dates:
Fixed Break Clause Dates:
Notice Date:
Option By:
Rolling Break Provisions:
Notice Date:
Option By:
Penalty Interest:
With a format as simple as this it will make the primary navigation all that simpler. Naturally, errors may occur in transferring the core information to The Map, but that’s not the fault of The Map, it is the responsibility of the person drafting and checking the document.
Earlier, I stressed that some leases are better than others and some are practically there. Many will believe my unnecessary thoughts bring little to the argument but perhaps it is time we moved into the computer age.
Thanks for reading.
What's the answer?
In my previous three articles, I have expressed a need to make the modern commercial lease a more accessible user-friendly document without detracting from its important legal implications. I’ve advocated for the inclusion of a ‘map’, a simple sheet highlighting the important clauses within the document, and again I know they are all important. I could hide and say it would up to the individual to decide what is important but why don’t I have a stab? Below is not definitive but we have to start somewhere.
Lease Date:
Type of Lease/Licence:
Landlord: Landlord Address Company Number:
Tenant: Tenant Address Company Number:
Demised Premises:
Outside 1954 Act:
Term Commencement Date:
Term End Date:
Length Of Term:
Rent Commencement Date:
Initial Rent:
Rent Free Period:
Service Charge Commencement Date:
Rent Review Dates:
Fixed Break Clause Dates:
Notice Date:
Option By:
Rolling Break Provisions:
Notice Date:
Option By:
Penalty Interest:
With a format as simple as this it will make the primary navigation all that simpler. Of course, errors may occur in transferring the core information to The Map but that’s not the fault of The Map, it is the responsibility of the person drafting and checking the document.
Early on in this series of articles, I stressed that some leases are better than others and some I have come across are almost there. Many will believe my thoughts are unnecessary and bring little to the argument but perhaps it is time we moved into the computer age.