Monitoring the 2002 Code of Practice for Commercial Leases Research Team

1. Monitoring the 2002 Code of Practice for Commercial Leases Research Team Neil Crosby, Sandi Murdoch, Cathy Hughes The University of Reading (http://www.rdg.ac.uk/crer/leasefinal.pdf)

2. Government interest • Property recession of 1989/90 long leases and upward only rent reviews • Complaints, Report and Consultation • 1st Code of practice Market changes but ineffectual code • 2nd Code of practice

3. What did Government want new Code to achieve? • Flexibility • Choice • Awareness

4. Reading University monitoring 2002 to 2004 • Analysis of IPD and VOA lease data • Interview survey of lawyers and agents • Questionnaire survey of lenders, property agents, solicitors, landlords and tenants • 11 case studies of lease negotiations

5. Flexibility Positive • Reducing lease lengths • More and earlier breaks • Easier operation of breaks • More schedules of condition

6. IPD All Property Average lease length 1997 - 2003 Continuing downward trend

7. VOA All Property Average lease length 1998 to 2003 Renewed downward trend

8. VOA Frequency of Lease Lengths - 2003 Note incidence of 15 yrs retail and 10 yrs office and industrial

9. Breaks • Variation in incidence • Local authority landlords have a different view on prevalence of breaks • Pre-conditions on operation rare

10. Flexibility Negative • Assignment and subletting still subject to conditions • Rent reviews still upward only

11. Rent reviews • Most are to market rent and on 3 or 5 year patterns • Almost all are upwards only • But 50% of 2003 leases in IPD have no reviews at all • Breaks often timed at review – but not escape route

12. Choice • No menus, little explicit pricing, few technical aids applied • Choice has to be sought by tenants rather than offered by landlords • Negotiation of terms - lease length, repairs and breaks most commonly negotiated issues

13. Choice – rent review type • Virtually no offers of alternatives made by landlords • Virtually no seeking of up/down by tenants or their agents • Review type bottom of ranking of negotiated major lease issues.

14. Small business tenants • More likely to occupy at lower rents and shorter leases • Less likely to take professional advice, especially commercial agents • Less likely to have had a business lease before • More likely to take lease on first terms offered • Less likely to know what is in the lease • Less able to negotiate best terms available

15. Impact of the Code of Practice • More awareness of its existence • LA landlords less aware of contents and less likely to inform tenants • Virtually no direct impact on specific negotiations • But played an important part in application of pressure for change in leasing practices

16. Conclusions – half full or half empty • Increased flexibility – lease length, breaks, repairs • No increased flexibility – review type and alienation • But fewer leases with rent reviews • Tenants not prepared to pay for up/down • Lease pricing “intuitive” not technical

17. Government decisions • Government Consultation - Deterring upwards only rent review clauses. 6 options offered • Decision not to legislate but keeping options open • Accepted our conclusion that assignment and subletting a major issue and have undertaken to review the law • Also accept our conclusion that SBTs an issue • Review of Code over the next 3 years