Buyers beware of the leap year! What buyers should consider when calculating rent apportionments
15 / 01 / 2020
Whilst the calendar contains 365 days, the time it takes for the Earth to orbit the sun is slightly longer. Therefore every four years we add an additional day to the calendar as a corrective measure. Behold the leap year. What is the significance of the leap year for buyers and sellers of commercial property? Why should investors in multi-let and high value properties take note?
When you are buying or selling commercial property that is subject to occupational leases, the rent will be apportioned on completion of the transfer. The tenant of a commercial property is usually required to pay the annual rent due under a lease by four equal quarterly instalments in advance on the usual quarter days. As the rent is paid in advance, an apportionment of the rent will need to be made to the buyer on the sale of the property.
On completion the seller will typically pay to the buyer any rent and other sums received from the tenant for the period from completion onwards. Under the Standard Commercial Property Conditions 3rd edition (“SCPC’s”), the rent is apportioned so that the buyer receives an amount equal to 1/365th of the annual rent for each day from and including completion up to the day before the next rent payment date. Does the number of days in a year make a significant difference to the rent due to a buyer on completion?
Let us consider two worked examples. You purchase one property subject to a lease with an annual rent of £500,000 and a second property subject to a lease with an annual rent of £10m. The rent has already been paid in advance to the seller for the period from 25th December 2019 until 24th March 2020. You complete on the purchase of both properties on 14th January 2020 and are entitled to 71 days rent (i.e. from 14th January until 24th March 2020).
- In a 365 day year the daily rent for a £500,000 lease is £1,369.86, but in a leap year with 366 days, the daily rate is £1,366.12. Under the SCPC’s the buyer is entitled to £265.73 more rent for the period 14th January until 24th March 2020, than if the actual daily rent was used in a leap year. This may seem like a fairly insignificant sum: however consider the benefit to the buyer where the annual rent under the lease is £10m.
- In a 365 day year the daily rent for a £10m lease is £27,397.26, but in a leap year with 366 days, the daily rent is £27,322.40. Therefore, under the SCPC’s the buyer is entitled to £5,314.77 more rent than if the actual daily rent was used.
So in a leap year, or ahead of a leap year, consider the following:
- consider whether rent apportionments are done on a 365 or 366 day basis depending on whether you are acting for the buyer or seller;
- the SCPC’s refer to apportionment on a 365 days basis but the seller may want to amend this to 366 days on a leap year. Using a denominator of 365 days produces a higher daily rate and is therefore more favourable to the buyer (assuming all rents have been paid on time). The buyer should therefore seek to incorporate the SCPC’s into the sale contract or ensure that provisions with equivalent effect are expressly set out in the sale contract; and
- for the number of days in a year to have a significant impact on the rent apportionment, the rent would need to be fairly high but a well advised buyer or seller will know their optimum position and method of apportionment.