For those beginning to deal with leases for commercial property, there can be a striking difference to the way in which monies like rent are paid.
The total money over, say, a year may be easily understood – for example £12,000 each year. But then the lease may go onto how, or more importantly when, this is paid - often on ‘quarter days’.
The Quarter Day Principle
This basically states that the money is paid in 3 month chunks, and not the more popular means of monthly or even weekly in other, say, residential leases. So, the above example means paying £3,000 four times a year, which then totals £12,000 for the whole year.
Now this is a large amount of money, rather than, for example, only £1,000 every month - and to make matters worse this is often in advance and not in arrears. Big potential problems for tenants who need to fork the bill, but great news for the landlord receiving this.
And it’s the landlords that these really benefit, as they’re getting more money up-front and therefore offers nice security. It may not sound fair, but as this is the norm for commercial property leases then deviating back to an ‘easier’ method later for a tenant is a plus point.
Going back to the tenant, this can cause real cash flow issues if this isn’t understood from day one. Okay, the actual amounts will end up being the same, but any business owner will know how important it is to only need to pay £1000 at a time rather than £3000, particularly when this is for future liabilities that you have not earned any income back from yet.
Check What’s Included
Whilst this is usual for the main rent, also watch out for other charges being on the same basis, for example service charge.
Or even worse, insurance premium on an annual-in-advance basis.
Oh yes, and completely separate concerning a tenant’s other outgoings, any business rates are generated on an annual basis as well, however dialogue with the local billing authority will often allow monthly payments.
When These Are
When looking at when these are, the majority are on set dates prescribed in the year, often referred to as ‘quarter days’. Or from another perspective, monies being paid ‘quarterly in advance’.
Sometimes these can be stated as different dates, but usually are meant as the 25th December, 25 March, 24 June, and 29 September. These may seem a little random, but that’s the way it’s evolved over time.
On a practical note, one way that you can remember these is to first remember the first one as Christmas day, and then the day in each of the other months being the same as the number of letters in that month in addition to 20. Therefore:
· Christmas day is the first one – 25 December
· March has 5 letters, so 20 + 5 is – 25 March
· June has 4 letters, so 20 + 4 is – 24 June
· September has 9 letters, so 20 + 9 is – 29 September
The ‘Modern’ Quarter Days
In an effort to try and get with the times, you can see reference to ‘modern’ quarter days which take the 1st of the proceeding month of each standard quarter days to try and round things up nicely, therefore:
· 1st January for just after the December quarter day (Christmas day)
· 1st April for just after the March quarter day
· 1st July for just after the June quarter day
· 1st October just after the September quarter day
Apportionment Getting Awkward
Whichever quarterly way you’re using, the actual amount each quarter is assumed the same even though the dates are slightly different each month (particularly with traditional quarter days).
So, the literal number of days between, say, the 24th June and the 28th September is more than the 25th March to the 23rd June. But the quarter chunks of money are the same each time.
However, watch out for the beginning and ends of these periods either at the start or end of the lease, or any mid-term changes like break clauses. These often do use a day-apportionment basis to split a quarterly charge up which can be different for different times of the year.
Alternative Ways Around
Taking a step back, it’s worth seeing what other options are available from either a landlord’s or tenant’s perspective to try and make things a little easier.
One is to simply agree a monthly rather than quarterly basis anyway, ideally the 1st of each month in advance. Okay it may not be the norm, but for a struggling tenant something is better than nothing.
On a similar line a landlord may agree to receive monthly payments, but keep the charges as quarterly in the lease. This can get a little confusing, and ideally needs a clear side letter to document, but at least on a practical note money can be broken down into bite-size monthly chunks even though on record it’s still due every quarter (and a landlord ideally having a right to resort back to this basis).
A final point is to be clear on how these payments should be made no matter what the dates are, right from interest charges to recovery-action if they are late or not paid, and even down to stating in the lease how they should be paid, for example by regular standing order.
Getting the Money Right
Therefore, as you begin to get your head around the principle of quarter days in a commercial property lease, begin by first understanding the principles at hand. Although it’s very beneficial for a landlord to have so much money being paid in advance every 3 months, it is the norm for usual commercial leases.
Therefore, make sure the cash-flow issues and timing is fully accounted for, or else you could come up a cropper.
However, don’t forget that there can be ways to get around this, which can also benefit a landlord as well. The most important time is when a lease is being first granted and there is an opportunity to state another basis of payment; but even afterwards there are still opportunities for change.
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