Commercial leases - will the Government intervene?

Many of you will realise that most leases of commercial property contain certain key features.

The length of the lease will be specified, the landlord or tenant may be able to "break" the lease early and there will often be a rent review during the term.

You might think it obvious that the terms of commercial leases are agreed between landlords and tenants.

However, in recent years there has been much debate among professionals and the Government about such terms and what they provide.

The Government's concern was that tenants were not being offered sufficient choice or flexibility.

So far, upward-only rent reviews have been a particular bone of contention. In June 2004 the Government published a consultation paper, Commercial property leases: options for deterring or outlawing the use of upward-only rent review clauses.

Some point out that upward-only reviews are a disadvantage to tenants because in a falling market rents cannot go down in line with market rents, yet others note advantages such as the ability to finance sale and leaseback transactions.

The property industry has a voluntary code of practice which encourages landlords and tenants to negotiate the terms of new leases openly and constructively and to obtain professional advice.

Landlords are encouraged to offer a choice of lease lengths and tenants are reminded that different lease terms may have a bearing on rents.

Recently, the final report of a two-year research study into commercial property leases has been published by the Office of the Deputy Prime Minster (ODPM).

The study monitored the operation of the Code and was undertaken by a team from the University of Reading.

The final report of 479 pages can be viewed on the OPDM website, www.odpm.gov.uk. It notes that whilst some aspects of leases have become more flexible - such as lease length, repairing covenants and the operation and timing of tenants' break clauses - others such as assignment and sub-letting remain largely unchanged.

Notwithstanding the Government's dislike of upward-only rent reviews, they still appear in many leases.

The Government will now be considering whether a change in the law is needed in the light of the final report's findings.

The Royal Institution of Chartered Surveyors considers there is no case to abolish upward-only reviews.

In the absence of any new legislation, further changes will continue to be market led.

If you have to deal with a forthcoming rent review or are considering granting or taking a lease, seek advice from an experienced property professional as there are often many issues that can be negotiated.

Simon Ferris in the "Bristol Evening Post": 16.3.2005