One big, and currently very contentious, way in which residential and commercial property differ is the way that rent is paid. Residential tenants on the whole typically make their rental payments monthly in arrears but for commercial tenants is can be very different. This is because, Commercial properties are usually rented on what are called Full Repairing and Insuring Leases (FRI), which means that the tenant not only has to pay the rental income but is also responsible for the upkeep of and the insurance on the property.
However, the main difference is that commercial tenants rather than pay monthly in arrears, they usually have to pay their rental income 3 monthly in advance on what are called the rent quarter dates. The traditional rent quarter dates are; 25th December, 25th March, 24th June and 29th September.
Traditional Rent Quarter Dates
One way that you can remember these is to first remember the first one as Christmas day, and then the day in each of the other months being the same as the number of letters in that month in addition to 20. Therefore:
- Christmas day is the first one – 25 December
- March has 5 letters, so 20 + 5 is – 25 March
- June has 4 letters, so 20 + 4 is – 24 June
- September has 9 letters, so 20 + 9 is – 29 September
Even though the number of days between these dates differ, the annual rent is always split evenly across the four quarter dates.
The traditional British Lease was born in Britain’s post war economic boom and pioneered by the Church of England, a large landowner. They were generally for greater than 25 years and the upward-only rent review structure ensured that rents could never go down. This, along with our strong property laws, has been the driver for billions(£) of investment into the UK commercial property market.
Whilst lease terms fell and stabilised at around 25 years, the time between rent reviews fell much quicker. In the 1950’s rent reviews only occurred every 50 years, by the 60’s this had fallen to 21 years, by the 70’s it was 7 years and today it’s every 5 years.
So it was not uncommon for a tenant, who had just spent a lot of money fitting out their commercial property, to want security of occupancy to sign a 25 year lease with 5 year upwardly only rent reviews. In the retail world, private equity backed brands were competing to get the most and best located outlets.
If nothing else the past 3 months of lockdown have shown that lease change is not coming, it’s here!
Tenants, especially in the retail and hospitality sectors, are struggling, the biggest issue is paying rent quarterly in advance, before they have made any money trading, and upwardly only rent reviews (usually linked to RPI). Tenants are now trying to renegotiate their leases to either monthly in arrears or potentially to a new type of lease, a turnover lease which is more common in Europe.
For a turnover lease to be effective, the tenant has to be fully open and transparent with their landlord with their financials, however, many tenants are uncomfortable with this. Turnover leases are not perfect, technology has already thrown a spanner in the works, for example – where a restaurant uses a delivery service such as Deliveroo, that revenue does not count towards the turnover in the turnover lease. The way that we consume is multifaceted and fast changing, the total opposite of a commercial property lease.
Tenants and landlords are fundamentally wedded and there has never been a time more than the present where they need to develop a congruent working and financial relationship.
Photo by Scott Graham on Unsplash
