This research project intends to assess and critically analyse what the impact, whether positive or negative. 'The Code for Leasing Business Premises in England and Wales 2007', has had on the commercial property sector from the standpoint of both the landlords and the tenants. It is designed, using primary research to aid the Government in assessing the level of success the Code has had and whether legislation is required to further enforce the protection of small business tenants. It is an interesting topic as the Government has sought to promote greater choice and flexibility in the property and leasing market for some time, but has been unsuccessful, also due to the fact that there are still very few reviews on the topic. The research, undertaken in July 2009 involves an investigation into leasing practice by small business tenants and their landlords, accompanied by secondary research.
- Structure of the Dissertation:
- Context and Background information:
Chapter 1: Introduction to the subject matter; containing the hypothesis, as well as the goals and objectives of the research.
Chapter 2: Literature Review; sets out to critically analyse the current literature published on the subject and understand currently established views on the topic. A gap in the knowledge is also identified in the existing published literature.
Chapter 3: Research Methodology; provides the methods and an explanation of them, that were used for primary and secondary research in this dissertation.
Chapter 4:Research and Analysis; questionnaires and surveys presented in tables and graphs along with their analysis. Interviews unable to be quantified are scrutinized and compared in full.
Chapter 5: Conclusion; compares the research with the hypothesis. Deducing its limitations and reliability, as well as whom these conclusions will impact, and any potential additional research that could be carried out.
The introduction of 'The Code for Leasing Business Premises in England and Wales 2007' has had no influence upon small business properties and their tenants and as a result was unjustifiable.
'The Code for Leasing Business Premises in England and Wales 2007' was launched by Yvette Cooper, then Minister for Housing and Planning, on the 28th of March 2007. It set out some key recommendations to those taking or granting new or renewed leases.
The code itself comprises of three sections:
- For the Landlord; a 10 point requirement guide in order for their lease to be compliant.
- For the Tenant; an explanation of the terms and 37 specific tips.
- A Model Heads of Terms, made available online.
'The Code for Leasing Business Premises in England and Wales 2007' is the result of collaboration between commercial property professionals and industry bodies representing both owners (Landlords) and occupiers (Tenants).
These include such members as the Association of British Insurers, the British council for offices, the British Property Federation (BPF), the British Retail Consortium, the Federation of small Businesses, The Royal Institution of Chartered Surveyors (RICS), The Law Society of England and Wales, and the Department for Communities and Local Government. It replaced the previous embodiment of the Code, published in April 2002.
The Code is voluntary so occupiers should be aware that not all Landlords will choose to offer Code-compliant leases. The Government has felt the need to promote the Code with a continual threat of legislation if it is not adopted this time by the property industry. However the Government takes a keen interest in ensuring the property industry complies with this voluntary Code.
Larger business operators are expected to conform to the Code as they have the resources to employ property professionals to act on their behalf. The Code appears to be more aimed at small business tenants seeking to offer guidelines, promoting fairness in commercial leases and aiming to protect small businesses, by ensuring they have the information available to negotiate the most suitable deal.
Objective One: To investigate small business tenants. A number of questions will be put forward in order to gain information into areas such as, lease terms, tenant satisfaction, and tenant awareness of 'The Code for Leasing Business Premises in England and Wales 2007'.
Objective Two: To investigate landlords, how they operate with regard to small business tenants, and what is their view is on 'The Code for Leasing Business Premises in England and Wales 2007'.
Objective Three: To gain extensive knowledge into the views of the Chartered Surveyors of The Code, and how The Code for Leasing Business Premises in England and Wales 2007 affects their decisions when advising a client.
Objective Four: To assess the primary research gained in objectives One, Two and Three, and discover how, or if decisions made by a chartered surveyor could indirectly affect a small business tenant.
Ultimately the aim of this research is to establish that the introduction of 'The Code for Leasing Business Premises in England and Wales 2007' has had no influence upon small business properties and their tenants and as a result was unjustifiable. While the existing literature discusses the changes in the relatively new Code, there is little information regarding its actual impact upon the industry. Due to the little research done on the new 2007 lease code, this document is intended to gain background information and research on lease practice in the UK, using the Island of Portsea and surrounding areas to determine the amount of business properties and their tenants that have been affected. The only published document comparable to this research is applied to the previous 2002 code and is therefore now outdated.
By gathering data using interviews, questionnaires, and exploring further information written on the topic in journals and articles, my aim is to gather sufficient evidence to establish whether my hypothesis is true or false. It is hoped that the research methodology set out in chapter three is adequate enough so as to create valuable research, which until now has not been documented.
Chapter 2.Literature Review:
A literature review sets out to critically analyse the current literature published on the subject and understand currently established views on the topic. Secondary research also provides direction to the primary research helping to identify further any unanswered questions.
In order to understand the subject, one must first acquire an understanding of the historical nature of business leases in the UK, and why there appears to be a need for market intervention through lease codes.
Lease Structure within the UK and its' progression.
- Historical Lease Length:
- Upwards-Only Rent Reviews (UORRs):
- Contingent Liability:
For the purpose of this dissertation, it is necessary to understand the historical nature of a business lease, how they are changing, and what normality in the current marketplace is.
The "institutional lease" also known as the 25 year FRI (full repairing and insuring) lease with upward only rent reviews was standard issue through the 1970's and 1980's. The introduction of more volatile economic conditions led to a change as the longevity of the leases was deemed unrealistic (Lizieri, C., Gibson, V., Crosby, N., Ward, C., 1998). This type of lease has also been described as the "backbone of property investment" (Hamilton, M. Cheng Lim, L. McCluskey, W., 2006).
Whilst the economic climate began to recover in 1995, "the expectation would have been that a recovery in the economy and the property market would precipitate a return to the bargaining strengths of landlords and tenants prior to the recession and a return to the terms of occupation which prevailed at that time" (Hamilton, M. Cheng Lim, L. McCluskey, W., 2006). However there was a contrasting view to this expectation and a number of reasons are given (Crosby, N., Gibson, V., Murdoch, S., 2002). Firstly, tenants who, after being introduced to more flexible terms were unwilling to return to the "institutional lease". Secondly, new accounts procedures forced tenants to show leases on their balance sheet as a liability and therefore highlighted the fact that longer leases financially burdened the tenant in many cases.
Research was conducted in 2006 that showed that occupiers are still shifting toward shorter leases in order to prevent themselves from being overexposed to risk. Shorter leases "tend to meet the needs of occupiers functioning in a rapidly changing economic environment" (Hamilton, M. Cheng Lim, L. McCluskey, W., 2006). 10.93 years was found to be the average lease length from January 2001 to March 2004, among 106 office leases taken in Birmingham, London, Manchester and Belfast. This would appear to prove a large departure from the "institutional lease".
However, this research does have its limitations. It remains unclear how large the offices used for the survey are. Larger offices are more likely to have tenants that require longer leases, mainly to justify for writing off fit-out and relocation costs (Dickenson, March 2007). If this is applied to this dissertation for example, the focus of the Code for Leasing Business Premises in England and Wales 2007 is upon small business properties and their tenants who are unlikely to have large fit-out costs.
The UORR is A clause in a lease wherein at a defined given point a rent review will occur. When this arises the rent will either be fixed at either the current rent passing or the open market value, whichever is the highest. As a lease becomes shorter in length, any fluctuations in market conditions are less likely to affect corporate liability. Therefore the lease rent review clauses become increasingly insignificant. A survey conducted in June 2005 by the ODPM (Office of the Deputy Prime Minister) came to conclusion that they had "strongly polarised views about whether or not the Government should legislate against UORRs." (Office of the Deputy Prime Minister, June 2005) The government has been considering a ban on UORRs for some time but has still not felt the need to act. A further survey conducted in 2007 by GVA Grimley and the CBI focused on the opinions of corporate tenants. "The survey returned only a small majority (57%) in favour of banning them (Cooke, July 2007). Cooke continues to comment that firstly this is not a large enough majority to consider a ban, and secondly, the size and sector spread of the survey was significant and there is a recommendation of further research. Any moves to remove UORRs will have a major effect on the security as property as an investment. Cooke's view is that as any legislation is unlikely to be retrospective, and therefore a two stage system will be in place, "corporate occupiers would not reap any benefit for some time". (Cooke, July 2007).
"There was a strong vote in favour of removing contingent liability, with 83% voting for its abolition" (Cooke, July 2007). This high figure suggests that many business occupiers are despondent with their current leases; however they are not forced to sign a lease with this agreement and as the research shows tenants are aware of the liability but appear to do nothing about it.
It should be noted that the size of corporate tenants questioned in the research conducted by GVA Grimley is unknown and therefore may offer a poor sample of information for what is required in my research. The Code is positioned to aid smaller tenants who often are unable to afford professional property services. Cooke describes his opinion that "corporate occupiers regard it as inequitable that, having assigned a lease to a third party and having received the landlord's approval to the transaction, they are required to step back in because of the "failure" of the assignee several years later". (Cooke, July 2007) If this is a commonplace problem in the market, then this certainly gives good grounds for a new code.
2002 Code of Practice for Commercial Leases (E2):
The second edition of the Code of Practice for Leases in England and Wales was published in 2002. Philip Freedman, one of the co-contributors to the 2007 code commented that "Although it was felt there had been a significant move toward shorter leases, and lease terms had become more flexible, small business tenants were still poorly informed about property matters and landlords were not offering tenants sufficiently flexible lease terms to match their business needs"(Freedman, 2006). Freedman continues to mention that the government was unsatisfied with the continued prominence of upward only rent reviews (UORRs) in longer leases, and was considering outlawing them.
The Code introduced in 2002 was very different from its predecessor from 1995 that it replaced. There were no objectives or aims set out in the Code, instead, ten key recommendations to business leases were listed. The first three were to promote open negotiation between parties, and to recommend financial advice on costs of occupation. The other seven points cover particular aspects of a commercial lease (Neil Crosby et al. (2005).
The paper "Monitoring the 2002 Code of Practice for Commercial Leases", co-written by Neil Crosby at Reading University for the UK government was designed to measure in detail the impact of the 2002 Code. It is similar to my piece of research, although it is now outdated and obsolete for professional consultation. It does however show key research that provides evidence that the 2002 Code was unsuccessful and therefore required change. An interview survey was carried out with an extensive number of chartered surveyors, and also with solicitors involved with conveyance and lease contract negotiation.
The perception of property professionals acting for clients in 2005 was noted as follows. Firstly, virtually all interviewees were aware of the 2002 code. Secondly it is clear that larger and institutional landlords are more likely to have knowledge of the code and smaller landlords may not. Thirdly, tenants are perceived to have no knowledge of the code unless they are large tenants with direct access to professional property services advice. The conclusion is that "Most consider that the Code is having no influence at all on lease negotiations, although some of the agent interviewees regard it as having some small, indirect, influence. Only two interviewees, one surveyor and one solicitor, are actively and regularly using the Code when negotiating on behalf of tenants."
The paper concludes that there is the perception among large commercial tenants that the lease structure system is unsatisfactory in the UK, even if they are unaware of the Code. International tenants appear to be more dissatisfied than their UK counterparts. The main reasons cited for dissatisfaction are the lease lengths, and the tenant's lack of break clauses.
The research methods used in this paper hold credit as the results were a catalyst for a code reform. It is highlighted that the Code is underperforming, and holds no or very little influence. The paper has been useful in developing my hypothesis as it gives a benchmark for success for the 2007 Code.
- "The Last Chance to Get Things Right":
The article titled "the last chance to get things right" written by Philip Freedman, comments on the shortcomings of the 2002 Code and gives specific direction as to changes that should be implemented in the new Code. The shortcomings are extremely valuable to my research because it shows direct areas in which the 2002 Code has been considered to fail and these areas should be focused upon when analysing the level of success of the 2007 Code.
Firstly, Freedman sights that restrictions on subletting and assignments have not been relaxed in accordance with the Code. Landlords, familiar with the landlord and tenant act 1995, had in recent years been imposing detailed restrictions on assignments, most notable with the introduction of required authorised guarantee agreements (AGAs). Tenants under such agreements are limited in their possibilities for assignment as it is difficult to find a sufficient tenant. Furthermore, the liability still remains in an event that an assignee defaults on the lease payments. His views are backed up by the research by the 2005 report conducted at Reading University. This research found that most leases that had the option for assignment automatically required the tenant to enter into an AGA.
Secondly, "between the period of 2002 and 2005, the courts upheld a number of landlords' rights to impose strict enforcement on lease clauses that require subletting to conform to specific requirements on rent or other terms"(Freedman,2006). Freedman sights the case Allied Dunbar Assurance PLC V Homebase LTD . This would suggest that the courts are not working in unison with the views held by the Government that businesses require further protection from landlords.
Freedman concludes, indicating that this is the last chance for the industry. A study into whether the new Code has influence or not would seem wholly relevant as it would provide knowledge on whether this "last chance" has been successful or not.
Code for Leasing Business Premises in England and Wales 2007:
After Yvette Cooper introduced the Code in March 2007, Geoff Le Pard considered the contents of the new Code. "The new Code is more concise than the 2002 version. It is written in plain English and provides more authoritative guidance on lease terms" (Le Pard (2007).
The article, from which the quote above is taken, was released 3 days after the Code was introduced. While this is time to provide commentary on the new aspects of the Code, it is unable to provide any reliable prediction as to how this will affect the market in the long run.
New aspects of interest that are assessed include firstly pricing options and rent reviews. "Under the 2007 Code, landlords must state whether a choice of lease terms is available and propose rents for different lease terms" (Le Pard (2007).
Secondly, restrictions on assignment are discussed. "One of the government's principle concerns is the inflexible assignment and subletting provisions in leases" (Le Pard (2007). The article continues by commenting that the Code only allows the provision of an AGA agreement, established problem of the 2002 Code, when the assigned tenant is of a lower financial standing than the outgoing tenant.
Thirdly Le Pard comments that the new Code insists Break Clauses should "not be prevented by conditions that effectively make the break inoperable" (Le Pard (2007).
Certainly the three features of the 2007 Code that are described by Geoff Le Pard can be tested using primary research as to their influence.
- "A Code that Lacks Strength":
"The reach of the new commercial lease code will be limited by the ability of landlords to opt out selectively" (Martin, 2007). In this article, John Martin explains that the government and BPF believe that landlords who subscribe to the Commercial Landlords Accreditation Scheme (CLAS) will gain marketing benefits. Part of the scheme involves the landlords abiding by the 2007 commercial lease code (landlord code). If rules are broken then private and public reprimand can occur however, the landlord code value is "watered down" in the fact that landlords can opt out of any specific requirements of the Code (subject to explanation). The extent to which landlords sign to the CLAS is not described, however is supports the view that landlords do not want to adopt the Code.
Martin also has an interesting view that the new guidance on assignments "appears to be an attempt to revert to the pre-1996 position, without re-instating the concept of privity of contract" (Martin 2007).
The article is however written with an assumption that the Code will be endorsed by property professional and therefore will spread throughout the market quickly.
Gap in the Knowledge:
As previously mentioned, there is a wealth of information published commenting on the Code for Leasing Business Premises in England and Wales 2007. What is unknown is the influence this code is having on the industry if at all. Considering the Code is thought to be the last chance for reform prior to legislation, its performance should be reviewed to show whether legislation is necessary or not. After reviewing the literature in this chapter, a conclusion has been drawn that the Code is unnecessary. There is not sufficient research to prove this and there is therefore a gap in the knowledge. The next chapter sets out the methods in which the hypothesis in Chapter 1 will be tested.
This research was designed to test this hypothesis;
The introduction of The Code for Leasing Business Premises in England and Wales 2007 has improved the position of a tenant when negotiating a new lease.
This chapter discusses the research methods applied and ultimately lead to a comprehensive conclusion that will either reject or confirm the hypothesis.
Traditionally, there are two different types of research. These are Quantitative research and qualitative research. Miles & Huberman (1994).
- Quantitative Research:
- Qualitative Research:
Quantitative Research is normally presented in Data, usually in the form of numbers and statistics.
"There's no such thing as qualitative data. Everything is either 1 or 0" (Fred Kerlinger).
The aim is to classify what statistics are important, count them and construct statistical models. One can then explain what is observed. Fred Kerlinger considers all research can be ultimately defined as quantitative as one could argue that all information can be displayed through binary (yes or no) questions and answers.
Qualitative research is based upon alternatives to statistical data such as values and opinions. Donald Campbell holds the view that all research must stem from an initial qualitative theory.
"All research ultimately has a qualitative grounding" (Donald Campbell)
It can be extremely useful when there is little or no previous research on a topic, as it can unearth new views and theories on a subject. Donald Campbell considers all research stems from an initial qualitative study.
- Secondary Research:
- Literature Review:
- Primary Research:
This type of research relies on the information and research submitted by others. The advantages and disadvantages are shown in table 3.1 above. Before writing this report, many books, internet articles, journals magazine articles were consulted so a thorough understanding of the subject was known. It should be noted that as the Code in question, The Code for Leasing Business Premises in England and Wales 2007, was only introduced at the end of April in 2007 there is therefore limited published material on the subject.
The literature used in Chapter 2 for the review is a form of secondary research, and while it shows the current knowledge on a topic, much of it is outdated and therefore unreliable. The literature review also highlighted the lack of material published regarding the lease codes in the UK. There are a number of magazine articles but there is only one academic report (Crosby et al. (2005)) that holds any significant value, but as stated it is outdated. Once the gap in the knowledge was identified from the literature review, it gave direction for a number of research questions to use in my primary research.
This is research that compounds new information. The following two types of primary research were used by my study:-
- Small Business Tenant Questionnaire.
- Landlord Questionnaire.
- Semi-structured Interview with Chartered Surveyors.
Tenant and Landlord Questionnaires:
- Target Audience:
- Design and Content:
- Response Rate:
The first stage of primary research involved two separate questionnaire studies firstly to tenants, and secondly to landlords. The questions aimed at the subjects were influenced by the report from Reading University "Monitoring the 2002 Code of Practice for Commercial Leases" (Crosby et al. (2005)). Questions were asked with a final goal of contributing to the objectives and aims of the report and testing the validity of the hypothesis.
The questionnaire provides an opportunity to understand the direct influence of the Code for Leasing Business Premises in England and Wales 2007 on tenants and landlords.
Questionnaires were completed in either of two ways. It was established that it would be far easier to gain responses from landlords if it was via email and therefore this is how the 20 landlords were contacted and how they gave response. With regard to the tenant questionnaire, it was decided that a questionnaire would be delivered to a number of tenants. After two days, these would be collected and any uncompleted questionnaires would not be counted. A total of 30 business tenants were visited. Due to the data protection act, names of tenants or landlords remain anonymous and cover notes were addressed to the "Manager".
Due to the large number of tenants and landlords in England and Wales, it is necessary to sample the respondents. The sample method used is a form of "random" and "cluster sampling" combined. Normal cluster samples are used when the subject research matter is too large to measure. Normally certain areas would be subject to research instead of the whole country for example. Often in cluster sampling, "the total population is divided into these groups (or clusters) and a sample of the groups is selected" (Wikipedia, 2008). In my research, this was further randomised down into sample of particular clusters. Areas used for the research were Windsor, Bracknell and Reading. It was considered that 30 tenants and 12 landlords would be a sufficient sample to gain the required information without mak ng the research excessively impractical.
Each of the two questionnaires were designed to be as clear as possible for the target individuals, and they also incorporate layman wording as to ensure each question is understood fully. The majority of questions asked utilised a multiple choice answer system. This enabled each paper to be completed with ease and also provide comparable data between different questionnaires. Copies of both Questionnaires including a covering letter for each questionnaire are included in Appendix B and C respectively.
It was felt necessary for a pilot copy of each questionnaire to be reviewed by a property professional prior to conduction of the survey. This was done for a number of reasons. Firstly the design of the questionnaire is reviewed to ensure it is easy to comprehend. Secondly, the wording is reviewed and changed if necessary. Thirdly organisation and the number of questions are reviewed. The pilot questionnaires were sent to a property professional Nigel Dight (Leslie G. Dight and Partners). It was decided after the pilot that a universal "do you have any other comments to add", would be incorporated as a final question. This gives the opportunity for landlords or tenants in the subject research to add any qualitative information they feel important to the subject.
Before each email was sent to landlords, a telephone call was made to ensure they were comfortable with the questionnaire. This ensured a high response rate. A covering letter (viewable in Appendix B) was also sent to emphasise the importance of the answers and how they help the research project. A response rate of 75% was achieved which was viewed as a success. A much lower response rate was expected from the tenant questionnaires; however, the 60% achieved was largely viewed as a success. It was expected to that ten respondents from each questionnaire would be achieved however this was exceeded. After this initial response it was decided therefore that no new respondents needed to be found as both questionnaires had exceeded response rate expectancy.
- Target Audience:
- Design and Content:
- Response Rate:
Interviews were carried out with chartered surveyors who have extensive current and previous experience in both tenant and landlord representation during lease negotiations. It is important that each interviewee has experience of the market over the last twenty years in order to have a comprehensive view of how the market has changed, and how this has affected tenants. Appendix D gives a list of interview candidates. A semi-structured interview technique was used to gather information from chartered surveyors because they are likely to have a wealth of experience and knowledge on the topic. The interview provides the opportunity to show the indirect impact of the Code for Leasing Business Premises in England and Wales 2007 because, unlike the questionnaires, the interviewed surveyors are more likely to have a broader understanding of the mechanisms within the market. If the code is found to indirectly affect a business lease tenant, the surveyor is far more likely indicate this than the tenant themselves.
Due to the large number of chartered surveyors in the UK it is not possible to interview them all. A random sample method is used to find suitable candidates for the interview process. It is also important the prospective candidates are vetted prior to the interview to ensure they have the relevant experience to answer the questions. Although only a small number of interviews took place, an attempt to provide a full spectrum of surveyors from the marketplace was achieved. One of the interviewees acts on behalf of large corporate clients, while another acts on behalf of smaller clients for example. It was viewed that only a small number of samples would be required as a predicted response rate was a high percentage.
Appendix D includes a list of outline questions that should be posted to interviewees. Although only a guideline, these questions were designed to gain the core information required from the interview. In practice, further questions and discussions took place during the interview. Compared with the questionnaires, this provides further in depth answers and opinions. The estimated time of each interview was intended to be around 15 minutes. This was firstly conceived to be enough time to gain the required information. Secondly it was not so long as to discourage any prospective interviewees from taking part. In practice the interviews lasted for around 25 minutes, due to the expansion of the core questions, however this did not cause a problem. A full transcript of each interview can be viewed in appendix E. Two of the interviews were carried out via telephone interview as this provided the easiest was to lease with surveyors at some distance. One interview was carried out in person due to the close proximity of their office. The interview in person proved to be more successful as the interviewee seemed more focused on the questions.
The response rate was 60% which was considered poor under the circumstances. A small number of surveyors were contacted with the initial view that all would provide an interview. The response rate did however fall between 60% and 100% which was my accepted range. The three interview candidates did provide substantial evidence for the research due to the large wealth of experience between the three chartered surveyors. It was decided after the initial round of interview applications, that re-applying, or searching for new candidates was not required, as the three interviewees had provided more information than expected.
A number of research methods can be used to understand a subject, formulate and then test a hypothesis. After conducting secondary research, both quantitative and qualitative primary research was undertaken.
A questionnaire was used to obtain knowledge of views regarding the lease held by business tenants of a range of office and retail units.
A questionnaire was used to obtain knowledge of views regarding the lease issued by landlords
In depth semi-structured interviews were conducted with chartered surveyors to obtain their views on:
- Lease Negotiations.
- Small Business Tenants.
- The Code for Leasing Business Premises in England and Wales 2007.
The two primary research methods were chosen because they provided easily accessible, reliable information at a relatively low cost that fulfilled the goals and objectives, set out in Chapter 1. The following Chapter provides a detailed summary of the primary research findings.
Chapter 4, Data Presentation and Analysis:
Primary Research was undertaken to in order to achieve the research objectives and goals. The questionnaires and interviews were undertaken in an attempt to prove or disprove the hypothesis. The presentation of the primary research in the chapter is dependent upon the method used. Statistical quantitative data retrieved from questionnaire results are displayed in appropriate tables and/or graphs. Qualitative information and opinion retrieved from the semi-structured interview study are extensively more complex to analyse and the results will be assessed separately. A possible link in the primary research that applies to the hypothesis will be concluded fully in Chapter 5.
Primary Research Findings, Tenant Questionnaire:
Questions 1-3 were introductory questions about the respondents to ensure the tenant was satisfactory for the questionnaire.
- Question 1:
- Question 2:
- Question 3:
- Question 4 part 1:
- Question 5:
- Question 6 part 1:
- Question 7:
- Question 8 and Question 9:
- Questions 11 and 12:
- Summary of the Analysis:
Q1 was a question designed to understand the size of the business and the number of people employed at the location.The majority of respondents are positioned as "micro" sized businesses. Only 27.7% of businesses questioned have 10 or more employees and none of the businesses questioned has more than 40 employees. This shows that the majority of those questioned in the survey can be classed as small businesses. 10 out of the 18 businesses questioned have only up to 5 staff employed. It is this type of business that the Code for Leasing Business Premises in England and Wales 2007 is attempting to improve the protection from landlords.
Q2 asks what type of use the subject property is used for.
Attempted sample included thirty respondents and it was attempted to provide an even split of retail and office units, as a small business lease can apply to either type. It should be noted that a lease could also apply to an industrial unit and these were not included in the survey sample.
Q3 was a question to understand what type of landlord the building is being rented from.
Figure 4.3 shows the types of landlord the respondent's building is let from. The majority of buildings in the study are shown to be let from private individuals. This is presumably due to the fact that they are fairly small units and therefore are unlikely to be owned by property companies of institutions. Only 16.7% of buildings were let from property companies. A space in the questionnaire was provided for respondents to fill in any other type of landlord such as a local authority for example however this option was not used, despite 33.3% of respondents unsure as to the nature of their landlord.
Questions 4-7 are questions regarding the nature of the tenants lease. It was expected that a number of respondents would not know the answer to these questions and therefore an "unsure" option was included in the answer to these questions. Ideally, if cost and time were not a factor, a larger number of respondents would be included in the survey to negate the number of unsure response.
Q4 part 1 asked the start year of the lease. This is important because many leases commence prior to the 2007 Lease Code. This means that when they were signed, they were possibly under the advice of the 2002 Code or possibly even the 1995 Code. Some institutional 25 year leases may have been introduced prior to any lease code, however this is unlikely in the small business tenant end of the market.
While figure 4.4 shows that 3 respondents are unsure of the start date of the lease it does show however that 6 leases were signed since 2007. This means that 6 leases may have been under the guidance of the 2007 Lease Code.
Question 4 part 2:
Part 2 of question 4, "if your lease was signed since 2007; were any alternative lease terms offered to you by the landlord?", was focused on the number of tenants who have signed new leases since 2007. This is because there is a possibility that the Code may have had an influence on the negotiation process. Of the 6 respondents who signed their lease since 2007, no respondents indicated that a number of priced lease options and alternatives were offered by the landlord. 2 respondents indicated that they were unsure. 4 Respondents indicated that there were no alternative lease terms offered by the landlord. The fact that no respondents were offered alternate options during the lease conception is important because it is one of the recommendations made in the 2007 Lease Code.
Q5 shows the length of lease of the respondents.
Figure 4.5 above shows the length of lease of the individuals tested. It now seems more reasonable firstly to have offered the respondents a larger number of options as 6-15 years and 15+ years are both offer a large spread of answers. Secondly, it would have been useful to know when the next lease renewal is for respondents and if the tenants will request shorter lease terms in the future.
Q6 part 1 was a follow on from question 5 in that it asked "do you have a rent review included in your lease agreement"? The results show that 9 of the 18 candidates have a rent review and this is presumably the respondents who have leases of length between 6 and 15+ years.
Question 6 part 2:
The most important part of question 6 is to know if the rent reviews are upward only (UORRs). The results show that 89% of the respondents who have a rent review say it is upwards only and the only other respondent was unsure. This would signify that while some leases are still long, rent reviews are still upward only.
Q7 involved three parts with regard to tenant break options, assigning the lease, and AGA agreements under the 1995 Landlord and Tenant Act.
Figure 4.6 show a large number of respondents are unsure about certain aspects of their lease agreements. This was expected, as the majority of small businesses are not considered experts in lease negotiation and it also shows that the respondents may have signed the lease without understanding the terms. This especially applies to the AGA. It is likely that in the leases where assignment is possible, an AGA is present even though even if 83.4% were "unsure".
Questions 8-10 are questions regarding negotiations of the lease.
Q8 Refers to the number to the number of respondents who utilised professional advice when obtaining their lease. Q9 is linked to the previous question because it explores the number of respondents who negotiated terms during the arrangement of the lease.
Indicate that there is a trend between lease negotiation, and tenants being represented by a property professional. The 2007 Code promotes negotiations between tenants and landlords. My research shows at least 12 respondents of the 18 studied chose to negotiate their lease. While only five respondents admitted to having professional property advice, this would lead me to believe the Code is having little impact on the industry. This would support a view that the Code is having little effect on the industry.
The study into tenant satisfaction is very significant to my research as it shows if respondents are happy with the terms they currently let their property. 0% of respondents were unhappy with the terms upon which their lease began, or its current operation, with 83.4% still totally satisfied during the time of the survey. This is important because it could suggest that the 2007 Code is unnecessary as market forces have provided satisfactory terms for the respondents.
Questions 11-12 are questions on the 2007 Lease Code. It was expected that none of the respondents would have known of its existence or how much it affected their lease negotiations for a number of reasons. Firstly as small businesses, not many would have the time to make their property provisions an important part of their agenda. Secondly, the Code was introduced relatively recently. Thirdly, many surveyors do not use the Lease Code, so if they advise a tenant client, the respondent may still have no knowledge of its existence.
Part 1 and 2 of Question 11 show that while only two respondents actually had knowledge of the Code, they both felt that it did not affect their lease negotiations. This is significant because firstly it shows that small business tenant knowledge of the Code is very minimal. Secondly it shows that the opinion of small business tenants is that the Code has no impact upon lease negotiations even with prior knowledge. . This does not mean that there is no impact and the opinion of Property Professionals should prove further insight. Q12 indicates just over 55% of respondents will consider the Code when next negotiating a lease.
To summarise the analysis of the questionnaires with small business tenant respondents, the value of the tenant's opinions can be considered to be somewhat limited. While the effectiveness of the Code can be measured by the knowledge of those it is trying to protect, it is possible that there is some indirect protection that the tenants are unaware of. Of all 18 tenants questioned, none considered the Code for Leasing Business Premises in England and Wales 2007 had affected lease negotiations directly. The research did however show that a large number of respondents did choose to negotiate their lease despite firstly a lack of professional advice, and secondly a lack of knowledge of the Code. As no respondents in Q10 indicated dissatisfaction with their lease terms, this would give some weight to an opinion that the Code is unnecessary as firstly tenants are not unhappy, and secondly they are negotiating leases themselves without advice from a Code.
Primary Research Findings, Landlord Questionnaire 4.3.1 Questions 1 and 2:
Q1 and Q2 were designed to give outline information regarding the landlord respondents. Firstly it was asked how many properties the landlords leased out to tenants.
The majority (55%) of landlords questioned leased out between four and eight properties. The remaining 45% leased out nine or more properties. It would have been more useful to propose more specific answers as the range spread is not particularly clear in the table above. However as all the landlords in question have at least four properties let, they should have good experience of the market.
The spread of properties owned by the majority of respondents were in local areas to Bracknell, Windsor or Reading. One respondent owns property on a regional level while three respondents (30%), lease out property nationally. One would expect the national landlords to be the larger of the ones questioned.
- Question 3:
- Question 4 and 5:
- Questions 6 and 7:
- Question 8:
- Questions 9 and 10:
- Question 11:
- Question 12:
- Summary of Analysis:
Question three asked whether the respondent landlords considered if leases were getting shorter. This was asked because the secondary research had indicated an increasing trend for shorter leases, however, it was predicted that leases had stopped falling in length. 77% of landlords considered leases were not getting shorter while the two other respondents thought they still were.
These questions apply to break clauses and assignment. It asked the landlord if it was considered they are becoming more common in lease agreements, and if the assignment clause is subject to an AGA. Reasons for inclusion of these clauses could be the influence of the lease Code 2007. Economic factors could also have an influence.The landlords questioned are fairly split on their opinion of break clauses with five thinking they are becoming more common, and four thinking the contrary. With regard to assignment, 77% of landlords think they are not becoming more common in the market. However, 66% of landlords have the view that assignment clauses are only available with an AGA. The Code for Leasing Business Premises in England and Wales 2007 states that "Authorised Guarantee Agreements should not be required as a condition for assignment". This would indicate that the market is still running contrary to the guidance of the code and therefore it could be considered to have no influence.
Q6 and Q7 are focussed on rent review. The response to both questions was considerably precise. Firstly, landlords were asked which type of rent reviews was considered normality from the following options.
Rent can only go up or stay the same
Rent can go up or down (initial rent as minimum)
Rent can go up or down (with no minimum)
100% of landlords chose option "a", thus showing that the UORRs are still the normality when negotiating a lease. The following question asked landlords if they thought this type of review would remain commonplace in lease agreements. Again 100% of landlords elected that they thought this type of review would remain the same. It is in the landlord's interest to operate this type of review because it keeps their investment more secure in a volatile market. The Code for Leasing Business Premises in England and Wales 2007 mentions a landlord may offer options "b" or "c" from Q6; however it would appear from Q7 that the landlords in the questionnaire are not supportive of this, and therefore one could consider the Code has no influence.
Represented landlords are more likely to have the Code influence their actions as their agents and advisors should inform them of RICS endorsed codes. The results to the questionnaire show that all but one of those questioned took professional advice during a lease negotiation. It is either possible that the only landlord who is not represented, is an expert themselves, or has a full time employed individual to handle issues such as these.
Q9 and Q10 are focused on alternative options offered to tenants during a lease negotiation.
Two of the landlords may have at some point offered priced alternatives to tenants, it has never been to any benefit as the options have never been selected by the prospective tenant. As this is one of the recommendations in the Code, it would seem that this is not being exercised. Possible reasoning is discussed in the analysis of the interview survey in 4.2.4.
Question 11 explores landlords' opinion on tenant negotiation during a lease agreement. The research indicates that 100% of tenants negotiate the terms of a lease. While the previous interview survey with tenants indicates that only 27.7% of tenants are represented (4.2.8). This would indicate that tenants are often negotiating terms without advice.
Q12, Parts 1 and 2 were in reference to The Code for Leasing Business Premises in England and Wales 2007. Part1 concludes that 66% of landlords are aware of the Code. This figure was expected to be lower. However it indicates that property professionals are possibly passing on the knowledge of the Code to their clients.
Part 2 of Q12 yielded a number of different results as it allowed landlords to give qualitative information regarding their opinion as to what influence the Code for Leasing Business Premises in England and Wales 2007 has on lease negotiations. This question only applied to the 6 respondents who selected "yes" for part 1. Two of the respondents declined to comment, a possible interpretation being that they had no in depth knowledge of what the Code is. Two other respondents admitted that they did not understand the Code and could therefore not comment. One of the respondents indicated that the Code has a negligible impact because market forces had already made lease negotiations more flexible. The final respondent indicated that the Code may have encouraged the discussion of a range of alternatives.
To summarise the analysis of the questionnaires with landlord respondents, one must firstly compare knowledge of the Code. While the research did show that a far higher percentage of landlords (66%) are aware of the Code than tenants 11.1%), the survey of landlords showed that tenants are still likely to negotiate their lease. As an unrepresented tenant is likely to gain knowledge of the Code from their landlord, Part 2 of Q12 revealed that of the 6 landlords with knowledge of the Code, only two had valid opinions regarding its implementation. This would show that landlords are unlikely to pass on their knowledge of the Code to their tenants and this would render the Code largely useless.
Primary Research Findings, Semi-Structured Interviews:
Of the five surveyors contacted, three produced in depth interviews, the transcripts of which can be reviewed in Appendix E. The questioned posed to each interviewee are shown in Appendix D. As the topic is fairly complex, in practise it took a diverse number of different questions to extract the relevant opinions of each surveyor. An analysis of the questions asked is shown in this chapter although other questions
- Lease Negotiations:
- Small Business Tenants:
- The Code for Leasing Business Premises in England and Wales 2007:
- Summary of the Analysis:
Question 1 Is the majority of your work in tenant, or landlord representation?
All three surveyors were highly experienced in landlord representation. Simon Fryer did however state that the majority of his work involved landlords, but he did do minority tenant representation work.
Question 2 Do you consider the majority of tenants are aware lease terms are negotiable?
All three surveyors considered that tenants were aware that lease terms were negotiable including unrepresented smaller business tenants. Nick Colvin states that is it "unusual for there not to be a negotiation".
Question 3 How would you present a marketable property for a client and would you explicitly state the lease is negotiable?
There is general agreement as to what the different surveyors would show a prospective tenant when marketing a property. Tim Bryant indicates that he would show a lease term such as "our client would like a 10 year lease". Simon Fryer indicates that they do not disclose terms or rents which "annoy" prospective tenants to some extent. He does this to provoke a prospective tenant into enquiring further. One could argue that the lack of information could increase prospective tenant's likelihood to negotiate, as terms and rents are not initially shown.
Question 4 Do you agree that most small business tenants are not represented during lease negotiations?
All three surveyors agreed that the majority of small business tenants are not represented during a lease negotiation.
Question 5 When acting for a landlord, how do you consider the position of unrepresented prospective tenants in the negotiation process?
With regard to unrepresented tenants, Tim Bryant considers that this position has changed in the last twelve months and is dependent upon economic conditions. "The agent now has to broker a deal". This would mean that a surveyor is more likely to help a prospective tenant reach satisfactory terms under a harsher economic climate as they are less likely to accept a deal on initial terms. Simon Fryer says that unrepresented tenants will "do a worse deal" than represented tenants. Nick Colvin agrees that it is certainly affected by the economic climate. A property with a number of interested parties can warrant more restrictive terms and/or a higher rental. He also states that surveyors often "trade off" rent with terms. Tenants who do not want to commit for long and want breaks are more likely to be told they must pay a higher rent.
Question 6 Do you believe breaks clauses are becoming a more effective tool for a tenant
All surveyors refer to the "institutional lease" with a 25 year FRI lease with no break clauses. Nick Colvin states that this was "something tenants wanted at the time". However economic conditions change and as it is considered more volatile, the needs of business have become more short term. Simon Fryer indicated that tenants are often granted a 1 or 2 year break clause because "it's very rare for someone to move in, do all the stationery, employ all the people, settle down and then move out a year or two later". Tim Bryant has the opinion that break clauses are becoming more commonplace in the market, normally due to tenants being advised they "want to go for flexibility". All the surveyors agree however that while break clauses are becoming more common in leases they are rarely utilised.
Question 7 What type of rent review do you consider the norm, and is this changing?
Tim Bryant considers that UORRs are the normal review. An introduction of upward and downward reviews are unsatisfactory as landlords will demand "a massive premium on rent". Nick Colvin considers that UORRs are far less important in the current market. "Leases we now grant are 10 years or less". The tenant can come off the lease using the break clause if the rentals have fallen. Shorter leases often have no review. It is important that the nature of rent reviews in leases currently being signed is assessed because while UORRs are still common, this may be due to remaining institutional leases that have not run their full 25 years.
Question 8 What is your view on subletting and assignments (AGAs) etc.
Simon Fryer considers this to be dependent upon the current market as other types of terms. As the tenant gains more power in a down turning market they can negotiate better terms in the lease. Nick Colvin considers that this is less significant in the current market. Leases now signed on for example "a 5 year lease with a break at the 3`d year, it's unlikely in truth that he is going to have much to assign". The Code for Leasing Business Premises in England and Wales 2007 is unlikely to have an effect with regard to subletting and assigning as it will apply to longer leases of more than 10 years. Furthermore it is unlikely that a smaller business tenant will sign a longer lease.
Question 9 Are you aware of The Code for Leasing Business Premises in England and Wales 2007?
All surveyors indicate that they are aware of the Code.
Question 10 Are you aware of the content of the Code and if so do you advise tenant/client landlords to use it.
Simon Fryer and Tim Bryant indicate that they have little in depth knowledge of the Code. Mr. Fryer does however state his opinion that this is "unusual". He does have one landlord client who utilises the Code in their Heads of Terms. Nick Colvin has knowledge of the code and "originally worked on an RICS committee which was involved in bringing it [the code] in". This would give his opinion on the influence of the Code extensive credibility.
Question 11 What influence do you think the Code has on lease negotiations by small businesses, if at all?
Nick Colvin states that "I never really saw the purpose or need for it". His reasoning is that the Code's policies are aimed at leases that have already previously been entered into and therefore are unaffected, such as tenants "stuck with 10 or 15 years left to run on a lease which is hugely over-rented". Tim Bryant disagrees with this. He believes that the Code is being implemented by the larger institutional surveyors and believes that the influence will be "reasonable". He does say the "market conditions will probably have a more marked effect than the Code". Simon Fryer cites his direct experience of the influence of the current Code. "In my experience the answer is zero". He does however say that he has one client who uses the Code in his Heads of Terms. In this example "he [the tenant] didn't ask me what this meant or why it said it".
Unlike the questionnaire survey, the interviews provide knowledge in a field where the respondents directly work. Therefore they should have relevant and credible opinions. All surveyors questioned have at least twenty years working in the industry and have historic knowledge of how the market has changed since the 1980s.
All of the surveyors interviewed indicated that the nature of business leases had changed over the last 20 years. It was also established that market forces have a large impact on the prospective tenant when negotiating a lease. Other than Tim Bryant, there was agreement that the Code is having little effect upon the industry. However Tim does have an interesting view regarding the actually implementation of the Code. While some surveyors advising their clients might encourage them to "offer things that they wouldn't normally offer for market reasons", he suggests that landlords get round this problem by "pricing all the options unrealistically". He goes on to describe this as "lip service" and says he knows of no one who has signed an upward and downward lease. This view is more in line with the other 2 interviewees.
Chapter 5. Conclusion 5.1 Introduction:
The final chapter draws a conclusion to the report which was carried out to test the hypothesis:
"The introduction of The Code for Leasing Business Premises in England and Wales 2007 has had no impact upon small business tenants and is therefore unnecessary."
- Aim of the Dissertation:
- The Research:
- Research Findings:
- Final Conclusion:
- Limitations of the Research:
- Recommended Further Research:
The main intention of the research was to test the impact of the Code from the perspective of three parties:
Small Business Tenants
A number of objectives were established in Chapter 1 with the ultimate goal of testing the hypothesis. After the secondary research was considered (see chapter 2), it was concluded that primary research was needed to test the hypothesis fully. The primary research consisted of two questionnaire studies of landlords and small business tenants. It also included in-depth interviews with property professionals. These research methods were chosen as they provided the most sufficient form for testing the hypothesis (see chapter 3).
The questionnaire study into landlords showed that 22.2% of the landlords surveyed had offered priced alternatives to prospective tenants. This is in accordance with the guidance of the Code. It was established that in no case were any alternate options taken up by tenants. This is also the view held by one of the interviewees Tim Bryant although he provides insight into why. He describes in his experience how he has seen landlords merely playing "lip service" to tenants. While alternative options may be offered to tenants in accordance with the Code, in practice they are priced at an unrealistic rate. While the Code may appear to influence tenants, this would indicate that it is merely a hollow tool that has no effect on the market.
It was established in the secondary research that business leases have been falling in length over the past 20 years. The tenant Questionnaire would support this view as it shows the at least 10 of tenants questioned had leases under 15 years. The landlord survey indicated that leases were not continuing to get shorter. It was also established during the semi-structured interviews that market forces have a large affect on tenants when negotiating a lease. "I never really saw the purpose or need for it [the Code]. Nick Colvin considers one perspective that the Code in now irrelevant due to the fact market conditions have changed. He comments that the Code is there to protect tenants with longer leases however most tenants do not commit to such long leases. The reason given for this is there is no "enormous shortage of property" and therefore leases "ten to be very much shorter".
While most parts of the research discussed in Chapter 4 indicate that the Code is having little impact upon small business lease negotiations, some important points are also raised in the interviews that fall contrary to this. Firstly while Nick Colvin indicated that the Code has little influence, he does still admit the Code is "valid" to a tenant thinking of committing to a longer lease. It should be noted however that a tenant committing to longer leases are unlikely to be small businesses and are therefore more likely to be represented during negotiations, and therefore minimising a need for the Code.
Secondly the Code has been introduced during an economic downturn. Simon Fryer indicates that the Code is more likely to protect a tenant during a boom in the economy. "It is there to protect the tenant isn't it, not the landlord". He continues to describe how a tenant requires more protection during an economic boom. This ground is fairly untested for The Code for Leasing Business Premises in England and Wales 2007 as there has not been a stable upturn in the financial markets since its introduction.
The results of my primary research show that during the current economic climate, and current lease trends, the Code has no influence, unless a lease is longer than 20 years. The research also shows that the majority of tenants are sufficiently satisfied with their leases and therefore a need for market intervention is also minimal. Market forces have naturally introduced many parts of the Code. The Government has considered for some time whether legislation is necessary to enforce policy contained in the Code. One might argue that the Code contains nothing worth enforcing.
To conclude, under current conditions the impact of the Code can be considered minimal and it is currently therefore unnecessary. During prolonged periods of prosperous economic circumstances where the market becomes landlord-driven more protection may be required for small business tenants. However, since the introduction of the Code this has not been a factor.
It is important to note that further steps could have been taken to improve the limitations of the research undertaken in this dissertation:
Time — as a set period of time was allocated for the completion of the research paper, there had to be some limitation on the amount of research carried out. A larger number of questionnaire candidates would have yielded a larger number of answers and a larger sample usually results in more accurate information. Further time could have also been taken to interview more candidates for the interview study.
Secondary Information — More literature could have been reviewed and included in the report to provide a more comprehensive outlook on the previous knowledge.
Bias - An attempt was made to reduce bias from the interviewer during the semi-structured interviews. Although it was important to probe the respondent for further information when necessary, it was generally attempted to ask the same uniform questions, and not provide the interviewee with an opinion.
Further Research on this topic is recommended. The Code has only recently become implemented and this is the first academic study. It is recommended that a further in depth study similar to the Crosby 2005 "Monitoring the 2002 Code of Practice for Commercial Leases" is commissioned by the government. Monitoring the effectiveness of the Code is negligible during an economic downturn and therefore any research must wait until the UK has recovered from the economic recession in 2008.
Appendix A Reference List and Bibliography Appendix B Tenant Questionnaire and Results Appendix C Landlord Questionnaire and Results Appendix D Semi-structured Interview Outline Questions Appendix E Semi-structured Interview Transcripts
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Crosby, N., Gibson, V., Murdoch, S. (2002), "Office lease lengths: Is there a mismatch between what occupiers want and what landlords give?" paper presented at the RIGS Cutting Edge Conference, Glasgow,Crosby, N., Hughes, C., Murdoch, S., (2005) "Monitoring the 2002 Code of Practice for Commercial Leases", Reading University Dickenson, P, (2007) "Compliance is the way forward on leases" Estates Gazette, March 2007
Freedman CBE, P, "The last Chance to get things right" Estates Gazette, April 2006
Hamilton, M. Cheng Lim, L. McCluskey, W(2006), "The changing pattern of commercial lease terms", Property Management, Volume 24.
Le Pard, G(2007), "It's up for Promotion", Estates Gazette, March 2007
Lizieri, C., Gibson, V., Crosby, N., Ward, C. (1998), "Right Space: Right Price? A Study of the Impact of Changing Business Patterns on the Property Market", Research Report, Royal Institution of Chartered Surveyors, London,Martin, J., (2007) "A Code that Lack Strength", Solicitors' Journal, August 2007
Miles, M. B., Huberman, A. M. (1994). "Qualitative Data Analysis" (2nd Ed.)
Bell, J(1999) "Doing Your Research Project" Third Edition, Open University press, Buckingham
RICS (1995), "Code of Practice for Commercial Leases. Royal Institution of Chartered Surveyors: London
RICS (2002), "Code of Practice for Commercial Leases (2e). Royal Institution of Chartered Surveyors: London
RIGS (2007), "The Code for Leasing Business Premises in England and Wales 2007". Royal Institution of Chartered Surveyors: London
Leedy, P. (2001) "Practical Research: Planning and Design". Fifth edition, Macmillan, New York.