Commercial Property Terms

Alienation

Alienation refers to a tenant's ability to transfer their lease interest to another party, either through assignment, subletting, or sharing occupation. Most commercial leases in the UK contain alienation clauses that require the landlord's written consent, which cannot be unreasonably withheld. Alienation directly affects liquidity, subletting potential, and investment value in commercial property markets.

Bad-Debt Provision

A bad-debt provision, or allowance for bad debt, is an accounting provision set aside to cover potential losses from unpaid rent or service charges. In commercial property, it ensures that income projections remain realistic by recognising the risk of tenant default or delayed payments. This allowance is particularly relevant during market downturns when occupier credit risk increases.

Break Clause

A break clause allows either the landlord or the tenant to end a lease early, usually at a specified date or under defined conditions. It provides flexibility to adapt to changing business needs or market conditions. Investors should pay close attention to break clauses when assessing lease terms, as they can significantly affect the stability and valuation of income streams.

Build-to-Rent

Build-to-Rent (BTR) refers to developments designed specifically for long-term rental, often funded and managed by institutional investors. While primarily residential, BTR schemes can include ground-floor retail or amenity space, making them part of mixed-use commercial portfolios. They are valued for stable cash flow, professional management, and growing demand in urban centres.

Business Rates

Business rates are a tax charged on most non-domestic properties in the UK, including offices, shops, warehouses, and industrial units. They are calculated based on a property's rateable value, set by the Valuation Office Agency (VOA), and paid to local authorities. Understanding business rates helps investors forecast occupancy costs and assess a property's net operating income.

Cash Yield

Cash yield measures the annual pre-tax income generated by a property as a percentage of the total cash invested. It focuses on actual cash flow rather than overall return, making it a key metric for assessing short-term income performance. Investors often compare cash yield against borrowing costs to evaluate the viability of leveraged acquisitions.

Commonhold Property

A commonhold property allows individual ownership of units within a building, like offices or retail spaces, with shared management of common areas. Investors considering commonhold property should note that it provides indefinite ownership, unlike leasehold, and simplifies property management through a commonhold association.

Core Assets

Core assets are high-quality, well-located properties with strong tenants and stable, long-term income. They typically involve minimal management or refurbishment risk and are favoured by institutional investors seeking predictable returns. Core assets are often found in prime city centres or key business districts, where demand and liquidity remain consistently strong.

Core Plus Assets

Core plus assets share many characteristics of core properties but offer modest opportunities for income growth through asset management or lease improvements. They may involve slightly higher vacancy risk or shorter lease terms but provide potential for enhanced returns. Core plus investments appeal to investors seeking a balance between stability and moderate upside potential.

Debt Service Coverage Ratio

The debt service coverage ratio measures a property’s ability to meet its loan repayments from operating income. It is calculated by dividing the property’s net operating income (or cash flow before financing) by its total debt service. A DSCR below 1.0 indicates that the income generated is not sufficient to cover the required loan payments.

Dilapidations

Dilapidations refer to the costs associated with repairing or restoring a leased commercial property to the condition required by the lease at the end of the term. These costs typically include wear, damage, or alterations that exceed normal use. Understanding dilapidations is crucial for both landlords and tenants, as disputes over liability can significantly affect net returns and exit values.

Distressed Sale

A distressed sale occurs when a property is sold under financial pressure, such as lender enforcement, insolvency, or urgent need for liquidity. These transactions often complete at below-market prices due to limited marketing or buyer leverage. Distressed sales can offer attractive opportunities for investors willing to assume higher risk in exchange for potential value uplift.

Early Repayment Charge

An early repayment charge (ERC) is a fee payable to a lender when a borrower repays a commercial mortgage before the agreed term ends. It compensates the lender for lost interest income and is common in fixed-rate loans. Investors should review ERC terms carefully when refinancing or selling assets, as these charges can materially affect net proceeds.

Equivalent Yield

Equivalent yield is a measure that combines current and potential future rental income to assess a commercial property's overall return. It provides investors with a standardised way to compare different investment opportunities, considering both immediate income and long-term rental value prospects.

Flats

Flats are to self-contained units within a larger building, often used as part of mixed-use or investment portfolios. In a commercial context, they may form the residential component of a broader mixed-use scheme alongside retail or office space. Investors typically evaluate flats for rental demand, lease structure, and potential integration within wider asset strategies.

Forced Sale

A forced sale occurs when a property is sold under compulsion, such as through receivership, repossession, or a court order. Unlike a standard market transaction, a forced sale usually allows limited time for marketing, often resulting in a lower sale price. For investors, understanding forced sale conditions helps in assessing true market comparables and potential acquisition risks.

Freehold Property

Freehold property refers to full ownership of both the building and the land it stands on, with no time limit on ownership. Real estate investors generally prefer freeholds for the long-term control and flexibility they provide. Investors value freehold assets for their stability, absence of ground rent liabilities, and stronger capital appreciation potential compared with leasehold interests.

Full Repairing and Insuring Lease

A full repairing and insuring (FRI) lease makes the tenant responsible for both internal and external repairs and for insuring the property. In multi-let buildings, the landlord typically manages the structure and common parts, recovering costs through a service charge. Landlords value FRI leases because they offer predictable income while passing most maintenance risk to tenants.

Gross Internal Area

Gross internal area (GIA) measures the total floor space of a building, including internal walls, columns, and ancillary areas such as corridors and storage rooms. It is commonly used in commercial property valuation and planning to assess total usable space within a building's external walls. Understanding GIA helps investors and developers compare property efficiency, calculate building costs, and determine lettable area potential.

Gross Yield

Gross yield is a measure of whether a property's rental income aligns with its market value. It is calculated by dividing the annual rental income by the property's value or purchase price and provides investors with a quick way to assess and compare potential returns on different properties. While gross yield offers a useful starting point for property evaluation, it's important to consider it alongside other metrics for a comprehensive investment analysis.

Ground Lease

A ground lease is a long-term agreement in which a landowner grants a tenant the right to use and develop the land for a fixed period, often 20 to 99 years. The tenant pays rent (monthly, quarterly, or annually) and will usually build on the site and occupy or sublet the building. The lease will set out what the tenant can and cannot do with the land. At the end of the term, the land and any buildings on it normally revert to the landowner unless the lease is extended.

Ground Rent

Ground rent is a regular payment made by a leaseholder to a freeholder for the right to occupy the land on which a property is built, separate from the main rent in commercial properties. Understanding ground rent is crucial for commercial property investors as it affects overall costs, property values, and long-term investment strategies in the UK real estate market.

Heads of Terms

Heads of Terms outline the key commercial terms agreed to between parties before solicitors draft a formal lease or sale contract. While not legally binding, they record essential details such as rent, term length, repair obligations, and any incentives. Heads of Terms help ensure both landlord and tenant have a clear understanding of the deal before legal documentation begins.

HM Land Registry

HM Land Registry is the government body responsible for maintaining official records of property ownership and boundary details in England and Wales. It provides title registers and title plans that confirm who owns a property, its legal boundaries, and any charges or restrictions. For investors and lenders, Land Registry data is a fundamental source for verifying ownership, conducting due diligence, and assessing transaction history.

Income Return

Income return measures the annual income a property generates as a percentage of its capital value. It represents the income component of total return, separating it from capital growth. Investors use income return to compare property performance with other asset classes and to assess portfolio stability over time.

Industrial Property

Industrial property includes buildings and land used for manufacturing, warehousing, logistics, or distribution. These assets are critical to supply chains and often valued for their transport links, site accessibility, and operational efficiency. The UK industrial sector has become a major investment class, driven by e-commerce growth and consistent demand for modern, well-located space.

Internal Rate of Return

Internal rate of return (IRR) is a financial metric that estimates the annualised rate of return a property investment is expected to achieve over its holding period. It accounts for the timing and size of cash flows, including income and eventual sale proceeds. IRR helps investors evaluate long-term performance potential and compare investment opportunities with differing cash flow profiles.

Internal Repairing and Insuring Lease

An internal repairing and insuring lease (IRI) is a lease structure in which the tenant is responsible only for the repair and insurance of the interior of the premises, while the landlord maintains the building's structure and external parts. IRI leases are common in multi-let properties where landlords retain control over shared areas. They provide a lower-maintenance option for smaller occupiers while ensuring the landlord upholds external standards.

Leasehold Property

A leasehold property is a commercial space owned for a fixed period without ownership of the underlying land. This arrangement is common urban centres, offering investors access to prime locations with potentially lower initial costs, but requiring careful consideration of lease terms, ongoing expenses, and property management responsibilities.

Loan-to-Value (LTV)

Loan-to-value (LTV) is a ratio that compares the amount of a property loan to the asset's market value, expressed as a percentage. It helps lenders and investors assess leverage and risk exposure. In commercial property finance, lower LTV ratios generally indicate stronger borrower equity and reduced lending risk, while higher ratios can limit refinancing flexibility or affect loan terms.

Maisonettes

Maisonettes are self-contained units arranged over two or more floors, each with a private entrance, often located above or beside ground-floor commercial space. In mixed-use freeholds, they are usually long leasehold dwellings whose access rights and maintenance obligations affect the value of the commercial units below. Investors consider maisonettes when assessing income splits, service charges, and lease complexity in mixed-use assets.

Market Rent

Market rent is the estimated amount a property could command in the open market at a given time, assuming normal lease terms and a willing landlord and tenant. It reflects comparable evidence, lease length, property condition, and demand in the local area. Market rent is a key benchmark for rent reviews, valuations, and investment appraisals across commercial real estate.

Mixed-Use Property

A mixed-use property combines two or more uses within the same building or site, such as retail on the ground floor with offices or flats above. These developments are common in urban centres and regeneration zones, where planning policy encourages mixed commercial and residential activity. For investors, mixed-use properties offer income diversification and potential resilience through multiple revenue streams.

Modified Full Repairing and Insuring Lease

A modified full repairing and insuring (FRI) lease makes the tenant responsible for most maintenance, while the landlord retains liability for key structural elements such as the roof or external walls. This arrangement is common in multi-let buildings where coordinating major repairs across tenants would be impractical. The specific division of responsibilities can affect income stability and long-term maintenance costs.

Neighbourhood Parade

A neighbourhood parade is a smaller row of local shops serving the nearby residential area, typically including convenience stores, takeaways, newsagents, and personal services such as hairdressers or dry cleaners. These parade assets are often owned as a single freehold and offer relatively stable income streams due to their convenience-based trade and essential service provision. Investors are drawn to neighbourhood parades for their resilient occupier demand and typically lower capital values compared to high street or town centre retail.

Net Effective Rent

Net effective rent represents the actual rental income a landlord receives after accounting for incentives such as rent-free periods, contributions to fit-out costs, or other concessions. It provides a more accurate picture of investment returns than headline rent alone, particularly in competitive letting markets where incentives are common. Investors use net effective rent to compare deals on a like-for-like basis and assess the true income potential of a property.

Net Initial Yield

Net initial yield (NIY) is a key metric used by commercial property investors to evaluate potential returns. It represents the estimated annual income from a property, expressed as a percentage of its purchase price or market value. Thoroughly understanding net initial yield is crucial for making informed investment decisions and assessing the profitability of commercial real estate opportunities.

Net Internal Area

Net internal area (NIA) measures the usable floor space within a building available for occupation, excluding structural walls, service areas, and common parts. It is the standard measurement for office, retail, and industrial lettable spaces. NIA is critical for calculating rent, comparing efficiency between buildings, and assessing investment value.

Net Take-Up

Net take-up measures the total amount of commercial space occupied during a specific period, accounting for both new lettings and space vacated by departing tenants. It provides investors with insight into market demand and tenant activity within a particular sector or location. Positive net take-up indicates growing occupier demand and typically supports rental growth, while negative net take-up suggests weakening market conditions.

Net Operating Income (NOI)

Net operating income (NOI) represents a property’s total income after deducting operating expenses, but before accounting for financing costs, tenant improvements, leasing commissions, or capital reserves. It provides a clear measure of the property’s ongoing cash flow from operations and is commonly used to calculate key financial ratios such as the debt service coverage ratio (DSCR).

Office Building

An office building is a property designed for businesses that provide professional, administrative, or service-based functions such as finance, consulting, marketing, or education. These buildings feature efficient floor layouts, reliable heating and cooling, and infrastructure to support modern communication and technology needs. They are typically configured for high-density use, with most of the floor area dedicated to workspace rather than industrial or retail activity. The building’s design and interior fit-out are intended to create a functional and comfortable environment for conducting business.

Opportunistic Assets

Opportunistic assets are high-risk, high-return investments that typically involve development, heavy refurbishment, or repositioning. These properties often have little or no current income but offer strong upside potential through active management. Investors targeting opportunistic assets seek significant value growth once the property is stabilised or redeveloped.

Overage

Overage is a contractual agreement requiring a buyer to make an additional payment to the seller if the property increases in value due to future development or planning gains. Also known as a clawback agreement, overage ensures the seller benefits from later uplift in value. For investors, understanding overage obligations is essential when modelling returns, as future payments can affect development margins and exit pricing.

Peppercorn Rent

Peppercorn rent is a token or nominal rent reserved in a lease to make it legally binding, even though no significant payment is expected. It's often used where rent has been capitalised upfront or where the lease is sold for a premium. In practice, a peppercorn rent means the tenant pays no ongoing rent during the term.

Planning Permission

Planning permission is formal approval from a local planning authority allowing specific development or a change of use of land or buildings. It ensures that proposed works comply with local and national planning policies. Obtaining planning permission is a critical step that influences land value, project viability, and investment risk.

Planning Use Class

Planning use class defines how a commercial property can be legally used, such as for retail, office, industrial, or leisure purposes. In England, the Use Classes Order groups similar activities together, and some changes may require planning permission from the local authority. Knowing a property's permitted use class is essential, as restrictions can affect future flexibility and value.

Premium

A premium is a one-off, upfront payment made by a tenant to a landlord or outgoing tenant to acquire a leasehold interest. It reflects the capital value of favourable rent or long lease terms. Premiums are common in long-leasehold and retail properties, where leases themselves hold market value independent of rent.

Purpose-Built Student Accommodation

Purpose-built student accommodation (PBSA) refers to residential developments designed and managed specifically for students, often featuring en-suite rooms, communal facilities, and on-site management. PBSA attracts institutional investors for its stable demand, professional management, and potential to deliver consistent yields in university towns and cities.

Receiver-Held Property

Receiver-held property refers to an asset managed by a Law of Property Act (LPA) receiver appointed by a lender after borrower default. The receiver's role is to protect value, collect income, and, where necessary, sell the property on the lender’s behalf. These assets are common in distressed or enforcement situations within the UK commercial market.

Registration Date

The registration date is the official date on which ownership or a legal interest in a property is recorded by HM Land Registry. It confirms when the transaction was formally completed and provides proof of title. The registration date is an important reference point in due diligence, verifying the current owner's legal rights.

Remortgage

A remortgage involves replacing an existing mortgage on a commercial property with a new loan, often to secure better terms, release equity, or adjust the loan structure. Investors use remortgaging to improve cash flow, fund refurbishments, or take advantage of lower interest rates without selling the asset. The process requires a new valuation and lender assessment, and any early repayment charges on the existing loan should be weighed against the benefits of the new arrangement.

Rent-Free Incentive

A rent-free incentive is a period during which a tenant pays no rent, typically offered at the start of a lease to attract occupiers or allow time for fit-out works. This concession is common in competitive letting markets and effectively reduces the net effective rent received by the landlord. Investors should factor rent-free periods into their cash flow projections and yield calculations, as they can materially affect short-term income and overall investment returns.

Rent Review

A rent review is a process in commercial leases where the landlord reassesses and potentially adjusts the rent to align with current market rates. This typically occurs at predetermined intervals during a lease term and can result in significant rent increases for tenants. Understanding rent reviews is essential for commercial property investors and tenants to manage long-term costs and negotiate favorable lease terms.

Repossessed Property

A repossessed property is a commercial asset taken back by a lender following a borrower's default on loan obligations. These properties are typically sold to recover outstanding debt and may present investment opportunities at below-market prices. Investors should conduct thorough due diligence on repossessed properties, as they may come with tenant issues, deferred maintenance, or limited information about the asset's history.

Retail Parade

A retail parade is a continuous row of shops, usually situated on a main road or high street, serving both local residents and passing trade. These assets typically feature ground-floor retail units with potential residential accommodation above and attract a mix of independent retailers and national multiples. Investors value retail parades for their diverse income streams and the flexibility to reposition individual units to meet changing occupier demand.

Retail Park

A retail park is an out-of-town development consisting of large format retail units, typically occupied by bulky goods retailers, supermarkets, or category specialists, with dedicated car parking. These assets benefit from accessible locations near major road networks and appeal to retailers requiring significant floor space and customer parking. Investors value retail parks for their covenant strength, longer lease terms, and ability to serve customers seeking convenient, car-based shopping.

Retail Prices Index

The retail prices index (RPI) measures inflation and is commonly used to calculate rent increases in commercial leases with index-linked rent reviews. Many leases now use the consumer prices index (CPI) instead, as it typically produces lower increases than RPI. Investors should understand which index applies to their leases, as it directly affects future income growth and can impact long-term returns.

Retail Unit

A retail unit is a commercial space designed for the sale of goods or services directly to consumers, ranging from small shops to large stores. These properties are typically found on high streets, in shopping centres, or within mixed-use developments and are valued based on location, footfall, and tenant covenant. Investors assess retail units by considering factors such as pitch quality, rental tone, and the resilience of the local retail market.

Reverse Premium

A reverse premium is a payment made by a landlord to a tenant as an incentive to take or retain a lease, often to reduce vacancy or offset fit-out costs. It may also be paid by an outgoing tenant to encourage a new tenant to assume the lease. Reverse premiums are sometimes treated differently for accounting or tax purposes depending on the lease structure.

Reversionary Yield

Reversionary yield is a metric used to assess the future income potential of a commercial property investment. It compares passing rent to estimated market rent, helping investors gauge potential income growth and long-term return prospects. A higher reversionary yield indicates stronger future upside potential, while a lower figure suggests the property is already close to its full income value.

Schedule of Condition

A schedule of condition is a photographic or written record describing a property's state at the start of a lease. It is used to limit a tenant's repairing liability by documenting pre-existing defects. Including a schedule of condition helps both landlord and tenant avoid future disputes about dilapidations and repair obligations.

Service Charge

A service charge is a payment made by tenants to cover their share of costs for operating, maintaining, and managing common parts of a multi-let property. It typically includes expenses for cleaning, security, lighting, and repairs. Transparent service charge management is essential for investor confidence and tenant satisfaction in multi-occupancy buildings.

Service Charge Cap

A service charge cap is a contractual limit on the amount a tenant can be required to pay in service charges during a given period, often expressed as a fixed sum or percentage increase. This provides tenants with cost certainty and protects them from unexpected spikes in operating expenses. Investors should be aware that caps can restrict cost recovery, potentially leaving landlords exposed to inflation or unforeseen maintenance expenses in multi-let properties.

Shared Freehold

A shared freehold is a property ownership structure where leaseholders collectively own the freehold of a building. It offers investors more control over property management and eliminates the burden of ground rent, making it an appealing option for commercial property investments.

Shopping Centre

A shopping centre is an enclosed or partially covered retail development comprising multiple units under unified management, typically anchored by major retailers and supported by smaller shops and leisure facilities. These assets benefit from coordinated marketing, shared facilities, and the ability to create a destination shopping experience. Investors evaluate shopping centres based on tenant mix, footfall, catchment demographics, and the centre's competitive position within its regional market.

Stamp Duty Land Tax

Stamp Duty Land Tax (SDLT) is a government tax payable on property purchases and certain lease transactions in England and Northern Ireland. The amount depends on the property's price or lease premium and is paid to HMRC after completion. SDLT affects acquisition costs and must be factored into all commercial investment and development appraisals.

Subletting

Subletting occurs when a tenant leases part or all of their rented premises to another occupier while remaining liable under the head lease. It allows flexibility for tenants with surplus space but usually requires landlord consent. Subletting arrangements are governed by the alienation provisions of the main lease.

Take-Up Rate

Take-up rate measures the speed at which available commercial space is being let or sold within a specific market or property type over a given period. It serves as an indicator of occupier demand and market momentum, helping investors assess the strength of a particular location or sector. Strong take-up rates typically signal healthy market conditions and can support rental growth, while weak take-up may indicate oversupply or declining occupier interest.

Tenant Covenant

A tenant covenant refers to the financial strength and reliability of a tenant, often assessed by credit rating or trading history. Strong covenants reduce income risk and enhance investment value. Landlords and investors analyse covenant quality to gauge rent security and inform pricing decisions.

Title Plan

A title plan is an official Land Registry map showing a property's legal boundaries, usually outlined in red. It accompanies the title register and identifies any rights of way, easements, or shared access. Title plans are essential for confirming site extent during transactions and development due diligence.

Turnover Rent

Turnover rent is a lease structure where all or part of the rent is calculated as a percentage of the tenant's sales revenue, rather than a fixed amount. This arrangement aligns landlord and tenant interests by linking rental income to business performance and is most common in retail and leisure sectors. Investors should understand that while turnover rents can provide upside potential during strong trading periods, they also introduce income volatility and require careful monitoring of tenant sales data.

Upward-Only Rent Review

An upward-only rent review allows rent to increase in line with market or index levels but not to fall below the previous rent. It offers landlords income stability and predictable cash flow. Although often criticised by tenants, upward-only reviews remain standard in UK leases and are valued for income predictability. They are a key reason prime commercial investments can deliver bond-like security of income, particularly for institutional landlords seeking stable long-term returns.

Value-Add Assets

Value-add assets are properties that require active management, refurbishment, or re-letting to increase income and capital value. These assets carry higher risk than core or core plus investments but offer potential for greater returns. Value-add strategies are common among investors seeking to reposition underperforming assets or capture market upside.

Void Allowance

A void allowance represents an adjustment for expected rent loss during vacant periods between lettings. It reflects anticipated downtime and is factored into cash-flow forecasts and valuations. Applying a realistic void allowance helps investors project more accurate net income and risk-adjusted returns.

Weighted Average Unexpired Lease Term

Weighted average unexpired lease term (WAULT) measures the average remaining lease length across all tenants in a property or portfolio, weighted by rent or area. A longer WAULT indicates stable, predictable income, while a shorter WAULT suggests potential re-letting risk. Investors use WAULT to assess income security and asset management needs.

Yield Compression

Yield compression occurs when property yields fall due to rising investor demand, leading to higher capital values. It typically reflects improved market confidence, stronger occupier performance, or lower interest rates. Understanding yield compression helps investors gauge timing, pricing, and relative value in a changing market.