Leases with upward-only characteristics

Clapham, Eric

doi:10.1080/0959991042000253174

Cited by 2 publications

(3 citation statements)

References 14 publications

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“…Grenadier (1996) evaluates a purchase option under default risk using a theoretical real options framework and finds that a tenant will maintain the asset and avoid default to retain the option. Several studies apply option pricing models such as the binomial (Cox et al 1979) and Black-Scholes models (Black and Scholes 1973;Merton 1973) to evaluate upward-only rent review clauses in property leases; such clauses allow rental to reset to the market rate if the market rent exceeds the contract rent (e.g., Ward and French 1997;Ward et al 1998;Booth and Walsh 2001;Clapham 2004). Ambrose et al (2002) numerical analysis shows that the initial rent in a 10-year upward-only adjusting lease is significantly lower than the rent in similar leases that allow both upward and downward rent reviews.…”

Section: Conceptual Framework and Review Of Empirical Studiesmentioning

confidence: 99%

Valuing options to renew at future market value: the case of commercial property leases

2023

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In this study, we develop and empirically test a valuation model for a commonly encountered option in office leases: a tenant’s option to renew at future market rent (a fair market value) with lease termination as the maturity date. The model integrates decision analysis with real options analysis and market risk with private risks. “Option value” is defined as the private value of the option to either party pre-contract, while “option price” assumes a fair agreement between transacting parties and can be positive (rental premium paid) or negative (rental discount offered). Without manifest expectations, an analysis of a sample of office leases supports the model’s logic with price estimates in a practical range. The tenants’ option price/value is shown to have a negative relationship with the original/renewal lease term; conversely, the landlords’ option value is positively related to the original/renewal term. Comparative analyses show that transaction costs have a positive effect on tenants’ option value and on prices, while vacancy costs and the vacancy period are both positively related to the landlords’ option value and negatively related to price. Market rent is found to have a negative relationship with option price. Overall, this study provides a theoretical analysis and empirical tests of the value of a real option that allows option holders to renew/extend their contracts at a fair market value.

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Section: Conceptual Framework and Review Of Empirical Studiesmentioning

confidence: 99%

Valuing options to renew at future market value: the case of commercial property leases

2023

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“…The length of term is a fundamental component in any commercial lease negotiation. For the lessor, locking tenants into agreements for longer periods provides the “backbone of property investment” (Hamilton et al , 2006), with well-trodden mechanisms for rent review (Clapham, 2004). For the tenant, they may seek an “escape route” and flexibility to adjust to market conditions – especially for activities where businesses may wish to downsize or upscale their access to space (such as retailing or the use of office space) (Orr et al , 2023).…”

Section: Pubs Leases and “The Tie”: The Appeal Of The Lease As A Lega...mentioning

confidence: 99%

“…These problems with the calculation of rent are exasperated by the widespread presence of so-called “upward only rent reviews” (Clapham, 2004, pp. 31–32).…”

Section: Examining the Role Of The Tied Lease In Structuring Relation...mentioning

confidence: 99%

“From the lease’s point of view”: the role of tied leases in shaping the UK pub sector

Meers

2023

JPPEL

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Purpose Much like their residential counterparts, commercial leases have a reputation problem. Although often derided as painfully dull and mundane documents, residential leases have begun to be interrogated by socio-legal scholarship with renewed interest. This paper aims to continue this line of work in the commercial context through a detailed examination of a widespread form of leasehold in the pub sector: the “tied lease”. Design/methodology/approach The paper draws on interviews with 14 publicans and archival research. Findings The author argues that the lease is a decisive actor in determining the balance of power between publicans and pub-owning companies and shaping the physical environment of pubs in the UK. Originality/value The author’s broader agenda is to argue that socio-legal scholars’ renewed interest in leases should not be confined to the residential context: commercial leases warrant far greater socio-legal scholarly attention.

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Leases with upward-only characteristics

Cited by 2 publications

References 14 publications

Valuing options to renew at future market value: the case of commercial property leases

Valuing options to renew at future market value: the case of commercial property leases

“From the lease’s point of view”: the role of tied leases in shaping the UK pub sector

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