Commercial leases for retail tenants – clean or dirty? There’s another option

Online shopping has caused a significant shift in the retail landscape creating an uncertain future for retail tenants and landlords.

Historically, retailers might have committed to a 30 year lease, however, today’s retailers, unsure of what the high street will look like in 30 years’ time, are opting for 5 to 10 year leases, preferably with break clauses. However, a shorter lease comes with its own set of challenges.

1. It gives tenants much less time to hit their ROI.
2. Depending on the type of lease, tenants must attend to their repair obligations sooner, facing a larger repair investment in 5 to 10 years, as opposed to 30.

From an investment perspective, commercial leases have historically tended to be termed either ‘clean’ or ‘dirty’. ‘Clean’ meaning a lease where the tenant has sole responsibility for the demise’s maintenance and repair, and ‘dirty’, meaning a lease with a schedule of condition attached, limiting a tenant’s liability to return the demised property in a better condition.

Tenants will opt for a dirty lease, however, a schedule of condition can damage the landlord’s investment and is, therefore, often resisted, with the potential outcome being stalemate!

However, there is another way.  A compromise that can benefit both landlords and tenants: taking a clean lease with an ‘upfront liability loan’.

The upfront liability loan places responsibility for all repairs with the tenant but in recognition, the landlord will provide an agreed financial lump sum, up front, to meet the predicted costs. The agreed sum will be calculated by a third party surveyor and where a surveyor is truly independent, with no conflict of interest, it should provide an honest, reasonable and unbiased figure.

The outcome is beneficial for both parties: the tenant is compensated for dilapidations prior to acquisition of an agreed lease term, and the landlord secures their investment.

For any further information on Dilapidations contact David Jay.