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New commercial lease – what length of term?

We are regularly asked by clients, whether landlords or tenants, what the appropriate length of a new lease should be for a particular letting. Unhelpfully the short answer is that it depends. There is no “one size fits all” and various factors will influence the negotiations.

In crude terms, from a landlord’s point of view the longer the term without a break the better and from a tenant’s perspective, often but not always, a shorter term with frequent breaks would be the preference. Longer terms (subject to the covenant strength of the tenant) are considered more attractive from an investment perspective and also for funders that may have a charge on the landlord’s freehold interest and so may be required to give approval to the new lease. Tenants have no interest in those aspects and will, quite rightly, be focused on their own business needs and the financial obligations associated with the lease. As such there is a tension between these two positions and so it will boil down to a commercial negotiation.

Where do you start? We would suggest a good understanding of the local market where the property is situated is crucial as the economic forces of supply and demand will have a significant bearing on the bargaining strengths of each party. It might be that there is a dearth of available similar space in which case the landlord will benefit by being able to demand a longer term. On the other hand, where there is an oversupply, tenants will be able to seek very flexible terms. Advice from a good local surveyor should be considered at an early stage as they are likely to have comparable evidence for similar lettings.

The trends in lease terms have changed over the years. It was not unusual during the 1980s and 1990s for leases to be routinely granted for 25 years, very often without break clauses. The position today is very different and in 2015 the average lease term was (according to market data) approximately 7 years which is an increase from the downturn of 2008 when the average had dropped to around 6 years but is a long way from the historical position.

We would typically work with the appointed surveyor and the client to agree the main terms of the lease as in addition to the lease length many other crucial provisions such as repair and rent review should be agreed in detail before the lease is drafted.

For any commercial lease issues please contact our commercial property team.

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