The modern British Commercial Property Lease was created in the post-war economic boom of the 50’s by the Church of England.
It included an upwardly only rent review clause, which at the time was not a big issue, as leases and reviews were written for terms of 50 plus years.
Over the years, landlords lowered the timing of these reviews initially from 50 years to 5 years commonly seen in today’s leases.
The upshot of which is that today’s long leases with 5 yearly upward only rents are killing the market, burdening tenants with rents they can no longer afford to pay and owners with properties they are now unable to rent.
The recent pandemic was the straw that broke the camel’s back, with retail and leisure tenants already struggling to compete with online sales, being forced by government to temporarily shut down. Whilst their income dried up, their requirement to make contracted rental payments continued.
In Continental Europe and Canada commercial leases are entered into using different metrics, rather than a £ per square foot rental, many retail tenants sign what is termed a ‘turnover lease’. The tenant either pays a low or no base rental which is topped up by a percentage of their sales revenue. The percentage of turnover differs between different types of retail tenant.
The ability to provide trusted levels of tenant turnover data is clearly technically available, but it depends on whether the tenant is willing to share that information with their landlord. In order for this to work, there needs to be total transparency and trust between the landlord and the tenant as they work closer together.
The way in which we purchase and consume all types of foods and goods is complex, multi-channel and fast moving and can throw a bit of a spanner in the works. For example, some UK restaurants entered into new turnover leases, where the definition in the lease of turnover was based on food and drink purchased and consumed on the premises.
Then along comes the likes of Deliveroo and Just Eat, which allows food and drink to be purchased but not consumed on the premises. Therefore the revenue from those sales was excluded when calculating the rent payable from turnover. Happy tenant but not so happy landlord.
Consumerism is ever evolving so landlords, tenants and commercial leases need to find a way to adapt and respond to these fast changing market conditions.
Photo by Cytonn Photography on Unsplash
