Declining Lease Lengths in Commercial Properties Literature review

Declining Lease Lengths in Commercial Properties - Literature review Example Researchers have not dwelt on the length of the lease except the reducing average lease lengths in the UK. A term structure of rental rates has been responsible for various lengths of the leases but it has been lacking in market reviews. A market review provides valuable knowledge into the relationship between rent and lease length, creating a balanced rent, depending on rent projections (Rowland, 2002). A lease length may depend on specific landlord needs such as redevelopment in the near future or for creating more space for another business tenant. Normally, landlords’ interests are served through long leases while tenants desire short leases with alternatives of renewal (Rowland, 2000). The possibility of such factors as cost of shifting and the cost of reletting could be crucial in deciding rents and lease lengths. Reletting costs may be borne by either the landlord, if the short lease expires or the tenant shifting premises before the expiry of the lease. These costs may not be transferable but can be reduced with mutual consent between the landlord and the tenant (Rowland, 2000). In a term lease there is no boost to reduce depreciation of the property, thus not securing the salvage value of the property (Miller and Upton 1976, p.766; and Flath 1980, p.253)). Smith and Wakeman (1985, p.903)) discuss how lease provisions may change the incentives for both parties, quoting the use of service leases (in which the lesser provides the maintenance) as a solution of avoiding the lessee’s inclination to ignore the property (Rowland, 2002). The deficiency of interest among tenants to take care of the property has been used randomly in the housing economics literature to state tenure choice (Henderson and Ioannides 1983, p.98)) and the observed reduced rents on lease renewal than new lettings (Hubert 1995, p.631)). Kanemoto (1990, p.7)) thinks that the problem comes in substantiating to a third party (typically a court) that the tenant has misused the property. Various types of contracts for maintenance of property change the possibility of not-suitable standards of maintenance (Rowland, 2002). Benjamin, de la Torre, and Musumeci (1995, p.179)) present a model of under-maintenance by tenants, which compares the current values of owning and leasing property. The difference between the maintenance of property by owner-occupiers and by tenants shows the overexploitation by tenants during the lease, with bad outcomes for the residual value. The authors state different methods to improve upon the leases to reduce or eradicate the effects of the tenant’s provocation to misuse the property, like entering into contracts for maintenance by the owner, providing the tenant an alternative to purchase, deposit security or adjusting the rent as per usage needs (Benjamin, de la Torre and Musumeci 1995, p.184)) (Rowland, 2002). Interestingly, in Northern Ireland, the private investors prefer long lease terms on properties situated in pop ulous locations and depending on the area let properties on strong terms in the agreement (Crosby et al., 2002)). The property market was on the boom during 2002 in Northern Ireland, resulting in easy finance due to reduced interest rates realizing greater syndicate transactions related to the property. These inward investment initiatives like call centers for leading companies, including Halifax, Abbey National and Prudential and software development companies like Northbrook Technology and Fujitsu (Hamilton et al., 2005).