Have things changed since the financial crisis?
The saying goes that beauty is in the eye of the beholder and as much is true when it comes to commercial leases.
Whilst the notion of an ‘ideal commercial lease’ is a brilliant and awe-inspiring idea, sadly, such a thing does not exist. Tenants and landlord will be alert to the key terms likely to affect their on-going interests.
For tenants this often focuses on the practicalities of paying rent (monthly or quarterly), their ability to assign or underlet the property to a third party if business doesn’t work out as hoped and the on-going liability for service charges and insurance rent.
For their part, Landlords will do their upmost to secure a clean rental stream by minimising their obligations in terms of providing services and making sure rent review clauses are as favourable as possible.
Landlords will increasingly have to take into account the extensive ‘green’ leasing provisions which now prevail in the regulatory environment. Landlords will often want built into new leases obligations on both parties to co-operate in obtaining energy efficiency information about a property and taking steps to improve energy efficiency. Don’t be fooled by this outbreak of bonhomie between landlords and tenants though. Landlords will certainly want to make sure that the costs of upgrading the energy efficiency of their buildings are picked up by their tenants by way of service charge. Tenants will battle hard against this arguing that it is the landlord on whom the regulatory burden should fall.
The struggle between the competing interests of landlords and tenants has become increasingly intense since the financial crisis. Whilst the bottom of the market just after the recession certainly provided an opportunity for savvy tenants to renegotiate some of the more challenging clauses of their leases, the recent upturn in the market and the shortfall of high-end commercial property in popular areas has put the ball firmly back in the landlords’ court.
The Code for Leasing Business Premises 2007 was designed to provide a level playing field for tenants and landlords by setting down a set of institutionally acceptable terms on key lease clauses such as break and assignment/underletting conditions. The new Model Commercial Lease (commissioned by the British Property Federation) was another tool designed to reduce the number of areas of disagreement between tenants and landlords and reduce the time and cost of negotiating a lease.
However, use of the Business Code has been slow at best. It is non-binding and therefore bypassed by many landlords who continue to use their own standard documents as the basis for negotiation.
So what makes a good new lease? For tenants this increasingly boils down to a few key clauses (break conditions and key assignment/underletting pre-conditions to name a few). For landlords, locking in their tenants to secure a long term rental income is (and will always be) a key aim and a tenants ability to break or assign a lease can often lead to intensive negotiation.
So despite the efforts to introduce more standardised lease terms through the Code and Model Commercial Lease, for the moment it is still the case that all is fair in love and war (and lease negotiation).