The lease of commercial property and its financial implications

Abstract

PURPOSE: This study analyses the significance of commercial property in Malta, and the financial implications borne by tenants when leasing such property. The key price determinants for the lease price are also analysed in detail. DESIGN: Nine semi-structured interviews were conducted with commercial real estate agents, tenants and landlords. FINDINGS: This study established that commercial property is significant in Malta and as a result of the recent developments in the legislation of the rental market, Malta experienced a rapid upsurge in said market. The liberalisation of the rental market in 1995, has been found to be one of the main factors which contributed to the current market state for commercial property. Other factors which shaped the current market scenario were also identified in this study. This study also established the key determinants when pricing a lease for a commercial property and findings also highlighted the importance of the duration of the lease and the financial effect it has on the lease price. The ‘Di Fermo’, ‘Di Rispetto’, and the ‘break clause’ were found to be the three most important clauses included in the lease agreement which are often brought up during the negotiation between the parties. Finally, the additional incremental expenses associated with the lease were also analysed and a link has been found between the type of commercial property being leased and the lease structure agreed between the parties. CONCLUSIONS: Given the current market state for commercial property, the financial implications borne by tenants are on the rise, and as a result, it is becoming challenging for their businesses to remain profitable especially in the start-up phase. The lease agreement is however subject to negotiation by both parties, and therefore it is vital that tenants are well informed about the clauses in an agreement since they are essential in negotiating a better deal. IMPLICATIONS/VALUE: This study highlights the importance of commercial property in Malta. This study will be useful to existing and potential new tenants, as well as foreign businesses seeking to relocate to Malta, which should help them fully understand the financial implications associated with leasing commercial property in Malta.