Communities and Local Government

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• Glossary of commercial property terms

Cities and regions

Glossary of commercial property terms

Glossary of Commercial Property Terms

Abandonment

The voluntary relinquishment of a property or an interest in a property, where there is no intention of resuming possession of the property or of maintaining rights in it.

Alienation

The transfer of an interest in property to another - eg sale of a freehold or the grant or assignment of a lease.

Amortisation

The gradual reduction of a debt or liability, especially by means of equal periodic payments at stated intervals which, in total, are sufficient to repay the capital or principal at the end of the given period and to pay interest on the outstanding balance throughout the period.

Arbitration

A method of settling disputes by reference to an independent and impartial third party, usually an arbitrator appointed by the President of the RICS. Arbitration is essentially an adjudication of the arguments of the parties, and as such differs from independent expert determination.

Assignee

A party to whom a lease has been assigned (see entry on assignment below).

Assignment

The transfer of a lease from one party to the other. Once a lease has been assigned, the assignee becomes responsible to the landlord for paying the rent and fulfilling the other obligations of the lease; however, in the event of default, the landlord can require the assignor to pay the rent under the doctrine of privity of contract, where the latter still applies.

Assignor

One who assigns a lease.

Break clause

A clause in a lease giving either or both parties the right to terminate a lease in specified circumstances.

Building lease

A long-term lease, imposing an obligation on the lessee to erect one or more buildings on the leased land, which will become the property of the landlord after the lease expires.

Capitalisation

The value of an asset assessed in relation to the expected future income (rental) stream.

Capital value

The value of an asset, freehold or leasehold, as distinct from its annual or periodic (rental) value.

Comparables

In determining the initial rent, or the market rent during the course of a rent review, parties and those acting on their behalf will have regard to evidence of rents for similar properties. Comparables may also be used to analyse properties' sale values.

Confidentiality clause

An agreement between the parties to a lease or sale that some or all of the terms will remain confidential. Third parties can however compel the revelation of such terms (for example, where they are required to establish comparables) by means of a sub-poena.

Contracting out

Agreement between landlord and tenant that the security of tenure provisions of Part II of the Landlord and Tenant Act 1954 shall not apply. (Section 38(4) of the 1954 Act makes specific provision for this. Such an agreement must be sanctioned by the court, on the joint application by landlord and tenant.)

Covenant

The word is used in two senses. First, in the strict legal sense, it refers to clause in the lease requiring the tenant (or landlord) to do something or to refrain from doing something; see also restrictive covenant. Second, it is used in the wider sense to denote the worth of a tenant (or, bearing in mind the doctrine of privity of contract, that of previous assignors) and hence the risk of default, which will have a bearing on the value of the lease.

Demised premises

Premises which are the subject of a lease.

Derogation from Grant

An obligation on the landlord not to take away with one hand that which he has given with another (eg storing explosives next to the tenant's premises!)

Determination

The bringing or coming to an end of a lease, or an estate or interest in property, especially by notice as expressly provided for in the lease or as a consequence of a fundamental breach of a lease condition. See also termination.

Discounted cash flow

An investment appraisal technique which takes account of the time value of money by assessing the present value of future income and expenditure. It is often used in valuing an investment or to show the viability of a project.

Distraint

The enforcement of distress for rent.

Distress for rent

A remedy enabling landlords to recover rent arrears by the seizure and sale of goods within the defaulting tenant's property.

Estimated Rental Values (ERV)

An estimate of the rental which a property is likely to command in the open market at a given time.

Estoppel

A principle in English law that a person cannot go back on something he has previously affirmed. For example, a tenant serving a counternotice to a section 25 notice cannot subsequently argue that the latter was invalid, unless he expressly reserved his position.

'Flip Flop' arbitration

A form of arbitration under which the arbitrator bases his award on the submission he considers most reasonable. It is claimed that this encourages parties to be more reasonable in their submissions and reduces polarisation.

Forfeiture

Forfeiture of a lease occurs when the landlord exercises his right to regain possession against the wishes of the tenant, where there is a breach in a condition of the lease, or a breach of a covenant.

Freeholder

One holding an estate in "fee simple absolute in possession".

Full repairing and insuring (FRI) lease

An FRI lease requires the tenant to pay all running costs, eg maintenance, rates and insurance.

Head lessee

Where a sub-tenancy (or series of subtenancies) exists, the highest leaseholder in the chain (who pays head rent to the freeholder).

Headline rent

The rent apparently being paid, which may not take account of concessions such as rent-free periods.

Independent expert determination

An independent determination of the rent to be paid on review. Independent expert determination differs from arbitration in that the independent expert is not confined to the evidence presented by the parties.

Indexation

The regular adjustment of a rent in accordance with a specified index, eg the Retail Price Index.

Institutional lease

The typical institutional lease has been developed in England since the 1960s to meet the requirements of the pension funds and insurance companies investing in property. Generally tenants pay for all repairs and insurance to give the landlord a clear net income and minimise his management costs. Traditionally the term has been 25 years without options to break (see break clause) and with 5 yearly upwards only rent reviews.

Interim rent

A landlord may apply to the court to fix an interim rent when he has given notice of termination of a tenancy or where the tenant has served notice of a request for a new tenancy on the landlord.

Investment yield

Annual rent passing as a percentage of the capital value.

Lessee

A party to whom a property has been let.

Lessor

The party letting the property (ie the landlord).

Market rent

The best rent at which a property might reasonably be expected to be let with vacant possession in the open market, with a willing landlord and tenant, taking full account of all terms of the tenancy offered.

Marriage value

Latent value which the merger of two or more interests in land would release.

Mesne landlord

An intermediate landlord.

"O'May rules"

The principle that the terms of a new lease, will generally follow the terms of the existing one; the onus is on the party proposing a change to show that it is fair and reasonable (O'May v City of London Real Property Co Ltd, 1983).

Off-balance sheet finance

Financial techniques which allow companies to incur debt, usually via associated companies or joint ventures, without the debt appearing in the group's consolidated accounts and affecting its gearing ratio.

Open market rent

See market rent.

Open market rent review

Where the rent review clause provides that the rent on review should be based on the open market prevailing for new lettings.

Over-renting

This occurs when the rent passing exceeds the current open market rent

Overriding lease

An intermediate lease which the landlord grants to another party for a term longer than that of an existing lease, thereby creating a landlord and tenant, but not a contractual, relationship between the new and old lessee.

Pendulum arbitration

See flip-flop arbitration.

Premium

The price an actual or prospective lessee pays to a lessor, usually in return for the rent being reduced to below what otherwise would be payable. Or a sum paid at the outset for the purchase of a lease. (See also reverse premium.)

Prime covenant

The best quality of investment, represented by prime property.

Prime location

The most desirable or sought after location.

Prime property

A term used to define property of particular interest to investors. Broadly, prime property is likely to be a modern or recently refurbished building, finished to a high specification, well situated in a commercially strong geographical location and let to a good tenant.

Privity of contract

The principle in English common law that landlord and tenant continue to have obligations under the lease despite subsequent assignment. Privity of contract was abolished for new leases coming into force from 1 January 1996. Leases entered into before then are still subject to privity, but landlords wishing to sue previous tenants still bound by privity have to serve notice within six months of rent or service charges becoming due. The current legislation enables landlords in certain circumstances to require the outgoing tenant to guarantee the performance of the incoming tenant, until there is a further assignment.

Quiet enjoyment

Most leases contain a covenant for quiet enjoyment, entitling the tenant to enjoy his lease without lawful entry, eviction or interruption.

Rack rent

The best market rent obtainable.

Re-entry

A landlord may exercise his right to regain possession of premises by peaceable re-entry where there has been a breach of a condition by the tenant, or a breach of a covenant of a lease with a forfeiture clause. (See also forfeiture.)

Rent passing

The actual current rent being paid.

Rent review

Leases generally contain clauses providing for a periodical review of the rent, say at five yearly intervals. The lease will generally specify what the basis of the review is to be: eg the open market rent prevailing at the time of the review, or, as is frequently the case, upwards only (see upward only rent reviews).

Rental value

The rent that a property might reasonably be expected to command in the open market at a given time, subject to the terms of the lease.

Restrictive covenant

A covenant in a lease restricting the tenant in some respect, eg a covenant in a shop lease providing that only a particular type of trade may be carried out at the premises. More generally, an obligation in a deed whereby the covenantor undertakes to refrain from some act affecting the land of the covenantee.

Reverse premium

On assignment, the payment of a sum of money by the assignor to the assignee a sum of money to reflect the unfavourable lease terms, eg where there is over-renting.

Reversion

The return of property to the landlord on the expiry of a lease.

Sale and leaseback

An arrangement whereby a property is sold, with the vendor simultaneously being granted a lease on the property by the purchaser, generally either at a rack rent or at some lesser rent related to the price paid.

Secondary property

A term used for property which is defective in one (or possibly two) of the characteristics of prime property.

Securitisation

The conversion of assets into tradeable securities.

Security of tenure

The statutory right of a tenant to renew the lease at the end of a term. Part II of the Landlord and Tenant Act 1954 gives business tenants security of tenure, but parties may make a joint application to the court to exclude security of tenure.

Service charge

The amount a tenant pays for services his landlord provides.

Side agreement

Terms agreed separately by landlord and tenant, or by buyer and seller, which do not form part of the lease or contract of sale.

Subletting

Where the tenant lets part or all of the premises to a subtenant, as permitted by the terms of the lease. It differs from assignment in that the head lessee remains responsible to the landlord for the payment of rent and fulfilment of other obligations.

Termination

The coming or bringing to an end of a lease, by mutual agreement, by the effluxion of time, or by the exercise of a right of one of the parties.

Turnover rent

Where part or all of a rent, especially of retail premises, is based on a specified proportion of the tenant's turnover.

Up/down review clauses

See open market rent review.

Upward only rent reviews

Clauses in leases providing for regular reviews, at which the rent will be fixed at either the current rent passing or the open market level, whichever the higher.

Waiver

The act of voluntarily giving up, or intentionally relinquishing, a claim, benefit or interest. A landlord waives his right of forfeiture, when a tenant is in breach of covenant, if he knows of the breach and accepts or demands rent or unequivocally recognises the continued existence of the lease.

Yield

See investment yield.