Happy Leap Day! Traditionally the day for women to issue marriage proposals, 29 February may also have an unexpected consequence for buyers and sellers of commercial properties when they work out their completion statements.
The Standard Commercial Property Conditions are a set of standard conditions which are incorporated (to a greater or lesser extent) into most commercial sale contracts. Under the Standard Conditions, when instalments of annual sums, such as rent, are apportioned the buyer is attributed with an amount equal to 1/365th of the annual sum for each day. This is true whether there are 365 days or 366 days in the year.
For the number of days in a year to make a significant difference the rent has to be fairly high, which is probably why the Standard Conditions don’t attempt to distinguish between normal years and leap years. However it is not inconceivable that the anomaly could have a noticeable impact for high income producing properties where completion occurs shortly after a quarter day in 2016. For example the sale of a property producing an annual rent of £10,000,000 completes on 1 April so the buyer is entitled to 85 days’ rent. In a 365 day year the daily rent will be £27,397, but in a leap year the daily rent is £27,322. Under the Standard Conditions, the buyer will be entitled to £6,375 more than it would be if the actual daily rent was used to calculate its apportionment.
The buyer will also receive a leap year bonus where a seller has agreed to provide rent top ups or rent guarantees as part of a sale and the buyer is entitled to a period which includes 29 February. For example a sale completed on 1 February and there is a rent free period until 1 March when the property will produce an annual rent of £10,000,000. In a normal year the buyer would be entitled to 28 days at a daily rate of £27,397. In 2016 the buyer is entitled to 29 days at a daily rate of £27,322. The difference is an extra £25,222 due to the buyer.
So in 2016:
- The buyer will get a leap year bonus where he is entitled to an apportionment of the rent paid by tenants for the property as a denominator of 365 produces a slightly higher daily rate.
- The buyer will also get a leap year bonus where the buyer is entitled to income for 29 February and the seller has agreed to guarantee or top up the rent.
- The seller will get a leap year bonus where rent is paid for the property to a superior landlord.
Where the rent in question is significant, astute buyers and sellers may therefore want to vary the Standard Conditions to correct the leap year peculiarity. Similarly where top ups and rent guarantees are involved, actual daily rents should be calculated and agreed between the parties.