Leasehold Land Issues: Glasgow renewable lease

November 22, 2011 at 10:07 am

The following is a summary of the more detailed article on Leasehold Land Issues available here.

The Glasgow perpetually renewable lease is unique to New Zealand. Such leasing emerged in colonial times in Otago where it was used to facilitate early land settlement. The Glasgow name seems to come from the Scottish connection.

The lease format evolved over time with a number of variations.

The common urban property lease has a 21 year term with perpetual renewal rights.

Leases commencing after the mid 1970’s usually have rental reviews at 7 year intervals.

The lessor’s estate is characterized by low investment risk, low to moderate income return, simple administration.

Whereas the lessee’s estate is characterized by greater investment and business risk as he/she sets about investing into the land to generate income that will meet the rental obligations and provide a commercial return relating to the business activity.

Considerable tension develops between the objectives of the respective parties.

Conditions that generate a substantial lessee’s interest include:-

  • A lengthy period between rental reviews
  • Strongly increasing land values
  • Substantial difference between the cost of borrowing funds, and the ‘rack-rent’ percentage that is applied to the land value for the purpose of establishing the rental amount on review.
  • A confident, low to medium risk business environment.

Assessment of the lessee’s leasehold interest is discussed at the Morice Web where this subject is developed in more detail.

Leasing arrangements work best between the parties when the market remains stable which allows the lessee’s improvements and business activity to remain relevant as the ‘highest and best use’ activity for a long period.

However markets do evolve and force change in land use which is not all bad. Freehold property in that environment has more ability to make transitions in a managed fashion with less time pressure because of not having the rental burden and having access to all of the property equity coupled with better options for financing redevelopment. A leasehold property that is underperforming with the possibility of lessee insolvency, contrasted with an impossible rental burden is a disaster for both parties

Entry filed under: Commercial/Industrial.

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