News and Views

Growing real estate liabilities

The consequences of new International Accounting Standards (“IFRS 16”) announced earlier this year (for enactment in 2019) are being analysed and realised and seem set to impact significantly on the way companies reflect real estate liabilities.

In essence the IFRS 16 Standard will require property liabilities over the full lease term to be reflected on the tenant’s balance sheet (akin to a finance lease).

Break options will not be recognised as a means to reduce lease liabilities so that may give rise to occupiers seeking shorter leases with an option to renew.

The long established trend over the past two decades to shorter leases is already in conflict with the aim of many landlords for longer term secure leases so market conditions will play a major part in determining whose aims win out.

Leases with fixed or upward only rental uplifts may become less attractive as compared to open market reviews but the property investment bedrock of upward only reviews is in our view likely to hold sway. Serviced offices with their short, flexible contracts may be increasingly sought.

Leading real estate solicitors Maples Teesdale (who advised Rockspring in the conveyancing of Monument Place, EC3) has published a full analysis of the new treatment and perceived impact on real estate leases.

For further discussion please contact Mark de Roeper or David Alcock..

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