Are standard leases the new norm? - Quick reads - Gateley
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Are standard leases the new norm?

Gateley Legal

In the current market it is very common to hear property industry people talking about how we are in “challenging times” and that “transactions are taking longer” or are “harder to get across the line”.

Approach to a successful deal.

A successful deal relies on getting signatures on documents quickly and no more so than with tenants. It is risky to give tenants too much time to change their minds.

This means that landlords and developers, now probably more than ever, want to keep the “legals” side of the leasing process as simple and quick as possible, to speed up the process, but also to reduce costs.

The traditional approach to leasing has it disadvantages including the fact that virtually every law firm has its own standard lease which has to be negotiated with a tenant’s lawyer.  They are also generally drafted from a landlord’s perspective in the hope that a tenant’s lawyer will not require the “normal tenant’s amendments”.  It is an adversarial approach to getting a lease completed.

Arguably this historic method is not helpful because the market has changed and there are now a raft of tenant’s amendments that are not only pretty much always requested by a tenant’s lawyer but are also generally accepted, even by an institutional landlord.

Back in 2007 I did talks on the introduction of the voluntary Lease Code and can recall that the industry was very sceptical of the impact it would have. But there has been a change to the extent that many of the Code’s tenant friendly provisions are now regularly being included. In relation to some areas the market seems to be ready to be more flexible and perhaps accept that some terms are standard provisions rather than negotiated points. Consider, for example, provisions on group sharing by tenants; the liability for uninsured risks and associated rent suspension; and also break right pre-conditions. These days it is rare to see a break right that is subject to the sort of onerous conditions that would have been seen 5 or 10 years ago.

So are we seeing a dramatic shift in the leasing process or a temporary shift because of market conditions?

It is hard to know. It has to be remembered that these changes are taking place against a background where the average lease term has fallen dramatically, currently standing at just under 6 years, including breaks.  Arguably with shorter lease terms it is easier for a landlord to be more flexible and accommodating.  Will the same flexibility be offered to longer, more valuable  leases?

It also has to be remembered that the market has not completely adopted the Lease Code. For example, the Code has always maintained its recommendation that authorised guarantee agreements (AGAs) should only be required from an outgoing tenant on assignment if the incoming tenant is of a lesser financial standing. The market has not generally gone that far. Occasionally you will see a landlord introducing a reasonableness test to the requirement for an authorised guarantee agreement, which is not the same thing as the Code requires, but many landlords still cling on to their absolute right to demand an AGA on assignment.

Is the market really ready to embrace standard leases?

Well an attempt is being undertaken by the British Property Federation (BPF) supported by a number of its members who are looking at a standardised commercial lease.  This is not the first time this has been attempted.  The Clear Let shopping centre lease produced by Land Securities had a similar aim and for less complex lettings there are, of course, the RICS standard retail leases and the Law Society standard business leases. But BPF’s plan is different, and ambitious, because the end aim is to produce variants for all the different property types, such as retail, office, shopping centre and industrial units, creating a full suite of leases alongside lease management documents such as a rent deposit deed and licence for alterations.  The lease is going to be designed to make transactions quicker and less contentious.  It will adopt a fair starting point and incorporate most of the usual safe guards that tenants currently seek during negotiations.  Based on plain English language, and deliberately drafted in a manner that results in very little need for negotiation, it is meant to simplify the process.  Although, so as not to give you the wrong impression, the draft of this “simple lease” is still around 60 pages long!

The stated aim is that all landlords should, in time, use the model lease in the same way that a large amount of banking documentation is now industry standardised.

Will this aim be achieved? Maybe.

A simpler lease that can be negotiated more quickly may save everyone time and money but are we actually about to see a revolutionary change in lease documentation – unfortunately I think it remains to be seen – the property industry, in particular the property investment and banking sector, are a generally conservative and cautious bunch. But, for those landlords that are advocating the customer service approach to leasing they may see an opportunity.  Ultimately one reason for perhaps embracing the initiative is because it will reduce the involvement and, therefore presumably the cost, of lawyers….

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