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The purpose of this paper is to demonstrate the impact of lease duration and lease break options on the optimal holding period for a real estate asset or portfolio.

The authors use a Monte Carlo simulation framework to simulate a real estate asset’s cash flows in which lease structures (rent, indexation pattern, overall lease duration and break options) are explicitly taken into account. The authors assume that a tenant exercises his/her option to break a lease if the rent paid is higher than the market rental value (MRV) of similar properties. The authors also model vacancy duration stochastically. Finally, capital values and MRVs, assumed to be correlated, are simulated using specific stochastic processes. The authors derive the optimal holding period for the asset as the value that maximizes its discounted value.

The authors demonstrate that, consistent with existing capital markets literature and real estate business practice, break options in leases can dramatically alter optimal holding periods for real estate assets and, by extension, portfolios. The paper shows that, everything else being equal, shorter lease durations, higher MRV volatility, increasing negative rental reversion, higher vacancy duration, more break options, all tend to decrease the optimal holding period of a real estate asset. The converse is also true.

Practitioners are offered insights as well as a practical methodology for determining the ex-ante optimal holding period for an asset or a portfolio based on a number of market and asset-specific parameters including the lease structure.

The originality of the paper derives from its taking an explicit modelling approach to lease duration and lease breaks as additional sources of asset-specific risk alongside market risk. This is critical in real estate portfolio management because such specific risk is usually difficult to diversify.

Using labour efficiently in service organisations is an important management objective since labour frequently accounts for more than 70 per cent of total operating costs. While most service organisations can use flexible scheduling rules to improve the utilisation of labour, selecting a good or “best” set of work schedules from a large set of alternatives has proved to be a formidable task. A new modelling procedure is described which allows optimal decisions to be made when the desired level of scheduling flexibility results in a very large population of possible schedules. Flexibility in shift scheduling is increased primarily through increasing the number of different shift lengths and allowing flexible placement of breaks. The power of the new modelling approach was used in an experiment described here to assess the relative impact of shift‐length and break‐placement flexibility on labour utilisation. The results indicated that, while either type of flexibility can improve labour utilisation, there was a rather strong synergistic impact from using both simultaneously.

This paper examines the changes in the length of commercial property leases over the last decade and presents an analysis of the consequent investment and occupational pricing implications for commercial property investments. It is argued that the pricing implications of a short lease to an investor are contingent upon the expected costs of the letting termination to the investor, the probability that the letting will be terminated and the volatility of rental values. The paper examines the key factors influencing these variables and presents a framework for incorporating their effects into pricing models. Approaches to their valuation derived from option pricing are critically assessed. Simulation methododology is applied to the rental and capital valuations of short leases and properties with break clauses. It is concluded that in addition to the rigour of its internal logic, the success of any methodology is predicated upon the accuracy of the inputs.

This paper aims to show that the accuracy of real estate portfolio valuations and of real estate risk management can be improved through the simultaneous use of Monte Carlo simulations and options theory.

The authors' method considers the options embedded in Continental European lease contracts drawn up with tenants who may move before the end of the contract. The authors combine Monte Carlo simulations for both market prices and rental values with an optional model that takes into account a rational tenant's behaviour. They analyze how the options significantly affect the owner's income.

The authors' main findings are that simulated cash flows which take account of such options are more reliable that those usually computed by the traditional method of discounted cash flow.

Some limitations are inherent to the authors' model: these include the assumption of the rationality of tenant's decisions and the difficulty of calibrating the model given the lack of data in many markets.

The main contribution of the paper is both by accounting for market risk (Monte Carlo simulations for the prices and market rental values) and for accounting for the idiosyncratic risk (the leasing risk).

Difficult economic and trading conditions make lease break options a point of significant legal tension between commercial landlords and tenants. For a tenant, the ability to break a lease provides a means of controlling costs and an exit from liabilities. For landlords, the loss of a tenant's covenant means an immediate adverse effect on the reversionary value of the property. The purpose of this paper is to examine recent English court rulings to highlight the need for strict compliance with break conditions if a tenant is to succeed in ending its liabilities.

The paper discusses recent rulings to assess the extent to which judicial interpretation of break clauses continues to favour landlords, and whether landlords' conduct in negotiations or correspondence leading up to the exercise of a tenant's break option might engage concepts such as estoppel to bind the landlord to a particular level of compliance or breach.

The paper concludes that the English court continues to apply a strict approach to compliance with break conditions, and that it remains the tenant's responsibility both to determine what needs to be done by way of compliance and to ensure that those steps are taken.

The authors place the most recent rulings on the perennially vexed issue of compliance with break conditions into a broader context, demonstrating that the judicial approach remains firmly based on the principle that a break option is negotiated for the tenant's benefit, and that any conditions precedent to exercise are highly likely to be construed against the tenant who agreed to a break conditional on anything other than service of notice.

It can be argued that the property valuation profession has historically relied upon uniformity as the basis of all capital and rental valuations. Within each property sector, differences in location and design were secondary to the underlying fundamental that the lease contracts for the properties were the same. During the 1980s most leases, in all sectors, were of 25‐year duration with the tenant being responsible for all outgoings. In the early 1990s the lease length reduced but most other terms remained constant. Rental valuation could therefore be made by direct comparison on a pro‐rata basis. Similarly, capital valuation would be made either by direct capital comparison, or by reference to a comparable rent and yield to determine the capital value by the investment method. Comparison was still the principal tool of analysis and this relied upon uniformity of leases within the market. In the late 1990s, the business environment experienced substantial structural change and tenants began to demand bespoke leases to suit their particular requirements. This has led to a plethora of different lease contracts, as tenants require shorter leases, the ability to expand and contract, break clauses and upwards/downwards rent reviews. The market is now as diverse as it was uniform in the 1980s. However, as pricing models relied upon comparison, valuers were reluctant to accept tenants’ new demands for flexibility as it was difficult to price these new contracts. This paper reviews the change in market conditions and equates the new requirements of the tenants with an increase in the uncertainty in the market. It argues that this uncertainty can be built into pricing models using probability‐based models and provides a scenario analysis to price a flexible lease contract.

The purpose of this research is to examine the awareness and understanding of break clause management by small business tenants in the light of the Appeal Court decision in Fitzroy House Epworth Street (No. 1) Ltd and another v. The Financial Times Ltd [2006].

The empirical data were collected using detailed questionnaires distributed to occupational tenants in three sub‐markets across the West Midlands. The questionnaire incorporated Likert‐scale and close‐response questions.

The general conclusions were that the tenants surveyed were dangerously unaware of the barriers that exist in trying to effect break clauses, a position exacerbated by the decision in Fitzroy.

The research points to an increasing need for tenants to be made more aware of the technical and management problems that surround the option to determine clause.

The paper offers an applied examination in an important aspect of contemporary lease management. It provides a platform on which to base further studies in other geographical areas for comparative and aggregate purposes.

This paper aims to contribute to the theory, practice and development trends in relation to commercial property leases.

The paper utilises three key methodological approaches to the research, namely, case studies, desktop literature review and questionnaire survey analysis. This approach enables the in‐depth analysis of both primary and secondary data in relation to the wider commercial property leasing market.

The main findings from an analysis of the case study cities demonstrate clearly that office tenants are requiring shorter lease terms, more tenant break options and rent reviews to market value.

The paper relates to the development of commercial property leases. While the research inferences are drawn from four major cities they would nonetheless represent a similar pattern from across the UK.

The findings of this paper should be of practical benefit to those involved in the drafting of commercial leases and in particular the management and leasing of commercial property.

This paper presents the results of original empirical research utilising data drawn from several authoritative sources. The value of the work lies in the lease patterns that have been discovered through the case studies analysis.

The upward‐only lease is the dominant rental contract in the UK, while the turnover lease is widely used in the US retail sector. This paper compares and contracts the landlord rent options in these two leases, interpreting and extending the earlier simulation analysis of Booth and Walsh and of Hendershott and Ward. While the options are similar, the ability of the turnover rent lease to induce greater landlord effort and co‐operation between tenants and the landlord suggest that both UK investors and UK consumers would be well served by greater use of the turnover lease.

The introduction of more flexible lease terms within the structure of commercial leases in the UK generates a number of challenging issues for investors, occupiers and their advisers. This emerging structural change requires a new approach to the management and pricing of commercial real estate. This paper examines the factors underpinning the desire for greater corporate agility, including business planning and risk management; globalisation; and existing and proposed changes to accountancy standards. In addition, the paper considers innovation in the supply of space and the substance of space contracts. It is the contention of this research that it is possible for all parties to derive equal utility from greater flexibility by matching occupier and investor requirements. However, any attempt to price the risk reallocation rationally must encapsulate the likelihood of experiencing greater income volatility as well as the probability of a break clause being exercised or, more specifically, the risk of experiencing costs associated with voids and re‐letting.