As landlords are looking at their empty properties whether on the high street or shopping centres, some are considering alternatives to the traditional FRI (full repairing and insuring) rent structure to attract new tenants. If you are a tenant looking for new premises or renewing your existing lease, there is no harm in asking for something different. If you are a landlord wanting to attract that good tenant, give yourself a USP and think outside the traditional approach. Either way, CWJ can assist.
Full Repairing and Insuring Leases
The classic FRI lease typically has a rent review every 5 years and this is “upwards only, market rent” in the majority of cases. The process will involve surveyors and quite possibly lawyers. It will take time away from the core business and can drag on for weeks and months. In times of economic uncertainty the market rent model looks outmoded and potentially unworkable. Who can say with any certainty what the current market rent for a high street restaurant or fashion outlet in 2020/2021 should be? Why would a prospective tenant take on a 10 or 15 year FRI, upward only lease when it might need to change its business model radically in the next 3 to 5 years?
Market Rent Review Structures
A relatively simple rent calculation method is indexation via the Retail Price Index or the (usually lower) Consumer Price Index. Landlords will want these to be upwards only again. The parties will have to take a view on the inflationary prospects and decide if this method suits them.
Stepped rents are a compromise within the classic market rent review structure. In this way the landlord gets the headline rent it wants at some point in the current rent period, ready for the next upward only review in 3 or 5 years time.
Turnover rents have been touted as the solution to the Covid crisis. A reduced base rent is augmented by a percentage of the tenant’s turnover. This option is not for the faint hearted. It requires very careful upfront consideration of how turnover is to be assessed. If the business is already established with forecasts, one might set an anticipated turnover top up, to be adjusted up or down each month or quarter. The calculations must consider how to ensure proper record keeping and transparency, especially where cash is involved. Footfall, group sales, online sales and click & collect issues must be reviewed. The landlord must be prepared to spend time analysing the data it receives.
Drafting a Commercial Lease
Having set the ground rules, these must all be captured in the lease wording which must also allow for evolution of the business model.
Rent free periods are a good old standby as are tenant break options. Tenants need to watch out for the wording on break options as there are usually pre-conditions which, if not satisfied, mean that the break option fails. Tenants on the other hand must watch-out for “backdoor” means by which landlords can augment their income such as management charges and provision of services and utilities at a profit.
With good and reliable tenants in short supply, it is no longer the case that tenants must inevitably roll over and accept the “standard” FRI, market rent terms.
To find out how CWJ can assist you in renewing a commercial lease, email:firstname.lastname@example.org