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Why are leases still being written with quarterly charges as standard?

15 11 19 business rates

We are possibly the only country in the world who charges rent on Christmas Day, when the whole country is closed for business; a fact that a lot of foreign investors find particularly strange.


The majority of leases in the UK are still constructed with annual rents being charged quarterly. This can be on traditional English quarters, modern English, traditional Scottish, modern Scottish and other variations, such as Crown quarter days. 

Why?

The traditional quarter days are still based on religious days and festivals from pre-16th century Britain.

  • Lady Day (25 March)
  • Midsummer Day (24 June)
  • Michaelmas (29 September)
  • Christmas (25 December)

Some may consider this fascinatingly quirky: I find it annoying…

Owners, especially those with American or European investors, do not want to see four large spikes of income in their P&Ls, so have to process journals moving two thirds of the quarterly rent into deferred income, then bringing back one third the following month and so on.

From a strict valuation perspective, the value of an income stream which is paid quarterly in advance is higher than the same income stream paid monthly in advance, due to time value of money; but the difference is generally marginal. Moving to monthly charges would remove this variation.

Lessees don’t want to pay rent quarterly, as it has a huge effect on their cashflow. This is particularly true during the current COVID-19 crisis where most concessions, both requested and granted, are to move to monthly payments of their quarterly rents.

With average lease lengths shortening, flexible leases becoming more popular and terms changing to turnover rents, it feels like quarterly rents become even less appropriate. 

Accountants are having to perform the journals to straight-line the rent, recognising it monthly rather than quarterly. Mid-quarter reviews can lead to disproportionate charges owing to the various numbers of days within the quarters. This is especially true in the June to September period which has a total of 97 days, giving it the largest number of denominators in any of the four periods.

In America and continental Europe, rents are standardly charged monthly on the 1st of the month, removing all the issues outlined above.  Commercial property is continually being led down the route of globalisation and standardisation – the IPSX is great example. Having income streams within the same fund (or listed property vehicle) which are out of sync with one another doesn’t make much sense.

My personal plea to solicitors the nation over – please construct all future leases with annual rents chargeable on a monthly basis on the 1st of the month.

All parties; owners, occupiers and accountants will thank you.

About the Author

Patricia Walsh is Head of Property Accounts within the Investment Property Management team. With over 37 years in the industry, Patricia has a wealth of experience; and, with her team of 40 skills individuals provides a fully comprehensive service to her clients which range from high-net worth individuals to large investment funds. 

For more information, contact Patricia at patricia.walsh@colliers.com.