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Wednesday, 17 August 2011

Lease Lengths are Getting Longer

The BPF/IPD Annual Lease Review 2011 reveals surprising evidence that, despite widespread economic woe and the travails of the high street, the average length of lease terms is getting longer.

Here’s a summary of the main findings:

·         The average length of all lettings increased from 5.0 years in 2009/10 to 5.3 years in 2010/11, measured on an equally weighted basis and including the first break where applicable. If licences and short leases of four years or less are excluded, then the average length of new leases (again including break clauses) increased from 7.2 to 7.6 years.

·         The average length of all new leases weighted by rent (including break clauses) rose to 9.4 years in 2010/11. This is a slight increase compared with the previous year when lease lengths were at their shortest in the review’s history (8.6 years).

·         2010/11 saw a decrease in the proportion of leases up to five years in length from 72% in 2009/10 to 63% in 2010/11. Although 63% of new leases were less than five years in length, on a rent-weighted basis they make up around 33% of all new leases. The longer leases make up a small proportion by number and a larger amount by rent or in other words, tenants who occupy larger units still tend to sign longer leases.

·         The proportion of leases with break clauses increased in 2010/11 to 31.1% compared to 29.4% in 2009/10. Break clauses became more common in new leases up to 15 years in length. However, the proportion of leases longer than 21 years with break clauses dropped from 31.1% in 2009/10 to 19.9% in 2010/11. The proportion of leases with break clauses also mainly increased in the retail sector and particularly in standard shops (34% in 2010/11 compared with 3.9% in 1999). [And if you want to exercise a break clause or are negotiating a new one – make sure you get it right! See my various posts on break clauses this year.)

·         In the retail sector, the proportion of leases with break clauses increased from 19.9% in 2009/10 to 24.8% during 2010/11; this was the largest increase since 2003. Leases from 11-15 years in length saw the largest increase, followed by 6-10 year leases and 1-5 year leases. On the other hand, the proportion of break clauses in longer leases (above 16 years in length) decreased.

Average lease lengths across all sectors increased in 2010/2011 after two years of consecutive falls. Retail continued to secure the longest leases (yes, really!) with and without breaks, followed by office, while industrial had the shortest lease lengths.

Overall, rent free periods increased to 13.4 months in 2010/11.

Leases granted for terms of less than 4 years were excluded from the analysis.

The review draws upon detailed evidence of almost 102,000 tenancies granted between 1999 and March 2011.

I suppose if one wanted to sound a note of doom (well, caution), you would have to bear in mind that since March there has been something of a downturn in business confidence which might be having a negative effect on the lengths of leases being granted now; not that I have any evidence of that.

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