Guide

Commercial property leases

Gateley Legal

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In this episode, Adam Youatt, a partner in our real estate team discusses the move towards standardised leases and provides guidance for landlords and tenants on what should be considered when leasing a property.

In this episode:

  • What are standardised leases and what do they mean for the property industry
  • Background on the Model Commercial Lease
  • A look at the future of the standardised lease and its advantages

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This episode is part of our straight talking business success podcast series. Learn more about the series and what we cover. This podcast is available on iTunes, Spotify and Soundcloud.

Read the transcript:

Host: Welcome to Straight Talking Business Success, your guide to growing and developing your business. So today I'm joined by Adam Youatt, a partner in our real estate team, to talk about leases. Now, last year it was the fifth anniversary of the model commercial lease and another key milestone in the movement toward standardised leases. We're going to be discussing that in some more detail today. So this is really a key podcast for landlords when deciding what type of lease to use. It's also of interest to tenants. So to begin with, Adam, why should the property industry even consider standardised leases?

Adam: I think that's easy to answer and it's because everybody involved in the lease transaction wants to get signatures on documents as quickly as possible. Commercially, the landlords want the rental income to commence, and the tenant generally wants to take occupation and start trading, and whereas the reality is often that the legal lease negotiations can seem to be tedious, costly, and even time consuming, this is not actually always the lawyer's fault. Just an approach where pretty much every law firm has their own standard lease, which has to be negotiated with the tenants listed. They're also generally drafted heavily from a landlord's perspective, in the hope their tenant's lawyer will not require the normal tenants' amendments. It's fundamental in an adversarial approach. And arguably, that approach is not helpful because the market has changed and there are now a raft of tenants amendments that are really pretty much always requested by a tenants lawyer, but are also now generally accepted even by institutional landlord.

Adam: This means that time and cost has been wasted arguing points, that in practice are largely unimportant or already accepted, rather than focusing on the smaller number of key points that actually matter to the parties. I think there's also another layer. Commercially, I think there's also been a growing desire among landlord's not to start their relationship with a new tenant with an unnecessarily confrontational approach, which does not reflect the trend of seeing tenants as customers. It potentially erodes some of that good will that's already been achieved during the commercial negotiations that take place before the matter is placed in the lawyer's hands. There's arguably an increasing pressure on landlords to act more failure and flexibly if they're to attract and retain tenants. Logically, therefore, if everyone used the same base lease terms, a standard lease, then the after sale approach could, to some extent, be alleviated.

Host: Okay. Okay. That's useful to understand. And so did the lease code mull that debate?

Adam: Well, I think some people in the industry would argue that actually we haven't moved on or we're not moving on as much as I'm suggesting. And I think historically, one of the barriers to adopting a standardised lease approach is that on the back of that lease code in 2007, they were called tenant friendly leases and therefore were perceived as being detrimental to the landlord's interest. I think there was perhaps a concern that if you start with a more balanced lease, then this encourages tenants to seek more concessions. But I think as well as the industry moving on, the legal profession is also moving on and most good real estate lawyers are focusing on getting the deal done quickly and efficiently rather than scoring points in an adversarial manner. I can remember doing talks on the introduction of the voluntary lease code back in 2007.

Adam: And the audiences at that time were very sceptical that it would make much difference, but there's no doubt that since its introduction, there has been a change in the approach taken to lease terms, to the extent that many of the code's provisions are now regularly being included. So I think it has more moulded the debate. There are key areas of a lease where the market seems to have moved on and accepted that the lease codes are standard provisions rather than negotiated points. Consider for example, revisions on group sharing by tenants, the liability for uninsured risk and associated event suspension, and also break write conditions. It's very rare that the break writers now subject the sort of owners conditions that would have been commonly seen 10 or 15 years ago.

Host: Okay, so there's mutual benefit being seen from those changes coming in.

Adam: Yes, absolutely. There's an advantage for both sides.

Host: Excellent. So what is the background to the model commercial lease?

Adam: Well, I think the difficulty has been that trying to come up with a balanced standard lease, there's been a tendency to try and make a one size fits all approach. And there have been lots of attempts in the past to create standardised leases such as the law society business lease, the RICS retail leases, and more recently things like the mean well leases, as well as the historical example of the clear let lease. The problem is that, apart from the clear let lease, which was an initiative largely aimed at shopping centres, these were predominantly aimed at short term letting, essentially five years or less. There was nothing that dealt with institutional leases, but I think the nature institutional leases moved on as well, since those were created, and say for certain specific asset types like hotels or cinemas, we rarely see 20 or 25 year leases now.

Adam: It's not really possible to simply issue a hundred page lease on a take it or leave it basis like you used to do. That change in market conditions helped bring forward the model commercial lease initiative, I think, because it was an initiative started by the property industry, not the legal profession, and the work was undertaken by the British Property Federation, supported by a number of its members. And their aim was to launch a suite of standardised commercial leases in a number of variants, but largely aimed at the 5 to 10 year lease terms, they were cover a range of sectors.

Host: Okay. So what exactly have they created?

Adam: Well, the leases cover retail, office, shopping centres, food, drink, and industrial units. So they've created a full suite of documents. They've also created alongside that, some documents, for example, rent deposit deeds and licenses for alterations, and the aim has been to create a fair starting point to make transactions quicker and incorporate most of the usual safeguards that tenants currently seek during negotiations, such as the ones I've already touched upon in relation to the lease code. As it is a BPF lease, it is largely lease code compliant, but they have been reactive to landlord feedback and it's not a hundred percent compliant.

Host: So we touched on earlier, that we've just come past the fifth anniversary of the model commercial lease. How successful has it been since their introduction?

Adam: Well, I think the honest answer to that is that it was always going to be a slow burn process. Because the document is free to download from the website, it's hard to actually have accurate figures on use. There's not very many records as to where it's being used across the industry, although you do now see it more commonly in transactions. I think also the point I made before about the fact that the BPF has tried to make the model least evolve in time and react to landlord feedback has helped. Give you an example on the most recent changes, which came in April last year, and absolute real estate obligation is being imposed on the tenants, as opposed to previous drafting in the original lease, which allowed for tenants to serve notice of a landlord requesting confirmation as to what had to be reinstated and what did not. The absolute real estate obligation is not compliant with the lease code, but the old drafting was unpopular with landlords and the feedback was that it was not being adopted so it was challenged.

Adam: I think this reflects the wider reality that although the lease has not being completely adopted by the market, for example, the code has always maintained the recommendation that authorised guarantee agreement should only be required from outgoing tenant on assignment if the incoming tenant is of lesser financial standing, whereas market [inaudible 00:07:35] suggest is that it's only moved on as far as possibly introducing a reasonableness test as a requirement for an authorised guarantee agreement, which is not the same thing. And many landlords still hang on to their absolute rights to [inaudible 00:07:46] an assignment. So the model commercial leases tries to take a balanced line on that, and there's introduced the reasonableness test.

Host: In your opinion Adam, how do you see the future looking for the standardised lease?

Adam: Well, I think the future could be quite exciting in terms of lease standardisation. There are many advantages to it. The model commercial lease is designed to allow some choices so that a landlord can still be flexible in their approach, and the intention would be that you use the template to create a bespoke relief endorsement for a particular landlord. Again, what [inaudible 00:08:17] usually known. It's just hard to monitor exactly how widely that's been taken up so far, but the advantage is that attendant would easily be able to see what changes have been made to the basic template, therefore making the lease negotiation process more efficient. It's common within the industry to see City of London Law Status Certificate of Title's being negotiated between lawyers and real estate finance transactions and other disposal transactions, and when those are drafted, it's common practice for the first draft of the certificate be sent with a comparison against the standard template document so that the changes can be easily identified.

Adam: There's no reason why in the future, the model commercial lease could not eventually be used in exactly the same way. This gives a number of advantages, both for institutional landlords, who might have large portfolios and want to create a consistency of approach across their portfolio, particularly for example if they use a number of law firms on their panel, or they change law firms, but they want to have that certainty of knowledge and know that the same base terms be agreed. It also has the advantage of being able to incorporate Scottish properties, because actually there's an initiative in Scotland, which has been set up by the property standardisation group in Scotland, where they're seeking to achieve the same sort of thing, but obviously reflecting just differences in Scottish law and look into the future as to how that might actually be more exciting in the wider property industry and the legal profession.

Adam: It might in due diligence transactions, in for example, acquisition or finance transactions, where machine readers or possibly even AI could be used in the future to analyse the leases. This would be much more meaningful exercise if the leases could be compared to a standard based model lease, and would enabled due diligence be done in a much more efficient manner. It has to be remembered, it's not as if standard documentation during property transactions is new. I've already referred to the city of London Law Status Certificate of Title, which is widely accepted by the bank industry for real estate finance transactions, and we also have the standard conditions of sale for sales and purchases, as well as a BPS, CPSE inquiries. It's been accepted that people will always want to make amendments to standard documents and insert variations or exceptions, but by having an agreed base document, with an agreed starting position, it frees the parties up to concentrate on the transaction specific terms that actually matter in practice. If you look around other sectors of the industry, for example, the construction industry, they've managed it with adjacency standard terms.

Adam: Likewise, the banking industry has achieved it with LMA documentation. And in my opinion, there's no real reason why the property industry should not be able to achieve it with leases. There are many advantages to all bodies in doing it, except ironically possibly not the lawyers, as arguably if leases become easy to negotiate, then legal fees may come under pressure, but in reality, it's in everybody's interest for transactions to be as smooth as possible.

Host: Excellent. Okay. So you've covered off a number of the advantages there. The key question here is, do you actually think this standardised approach will be accepted?

Adam: Maybe. I think it's got a long way to go and I think it remains to be seen. There are a lot of people in the industry who are strong supporters of it, but equally there are a lot of people who are entrenched in the current traditional way of doing things, but in my opinion, there are very good commercial reasons to adopt it. So hopefully it will gain more traction.

Host: Okay. Thank you very much for that, Adam. So what are the next steps if anyone's looking into this space and need some assistance?

Adam: If people are interested in looking at the model commercial lease, or even developing a bespoke model commercial lease for their own portfolio, then my contact details are available with this podcast and I'd be happy to talk to anybody about it.

Host: Excellent. Thank you very much.

Host: Thank you for listening to Straight Talking Business Success, to find out more about the series, please visit gateleyplc.com/businesssuccess. From here, you can subscribe for updates, meet our speakers and get more information on all of the topics that we've covered.

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