Break clauses increase in popularity
July 2011
Januarys is reporting a rise in the number of break clauses being inserted into commercial leases.
A break clause, which allows tenants to leave at set points during a lease, is becoming increasingly popular as businesses require more flexibility to cope with a constantly changing, global market.
“When I first started in commercial property,” says Nick Muncey, our Head of Agency Department, “Companies had very little choice but to accept 25 year lease terms with no breaks. This applied to multi-national businesses wanting to come to the UK as much as local start up firms.
“Even then, the UK market was unusual in demanding its tenants rented office space for a quarter of a century and, with flexibility becoming an ever more important consideration in the business world, companies have begun to demand better terms from their landlords.
“This is happening across the board, in both brand new and second hand office space.
“The result is that there is no such thing as a ‘typical lease’ any more. They are much more tailored to an individual firm’s requirements. In Cambridge, for example, many businesses only have funding for up to three years, so it is unrealistic to expect them to sign up to a ten year lease without break clauses at perhaps three and seven years.
“The increase in home working has also had an impact. I know one firm which doubled its number of staff from 40-80 people but reduced its need for office space as so many of them worked remotely.”
It is a trend that Nick expects to continue. “This is not something that has been led by the current financial situation. It is being driven by increasing globalisation and more astute tenants and as such we are unlikely to see 25 year leases return.
“One piece of good news for landlords is that in return for break clauses, companies do seem prepared to pay an appropriate rent, so levels have not been affected as much as we might have expected.”