BLM20515 - Defining long funding leases: funding leases that are not long funding leases: short leases: allowable variation in rentals

The amounts by which the rentals may vary is determined by looking at the rentals payable over various 12 month periods, which the legislation refers to as reference years. These are

  1. the first reference year, which is the period of 12 months beginning with the day following the one on which the term of the lease commences;
  2. the other reference years are successive periods of 12 months each beginning on an anniversary of that day and ending before the last day of the term of the lease;
  3. the final year is the period of 12 months ending with the last day of the term of the lease.

It follows that any part of the final year, other than the last day, may also be part of a reference year.

To be a short lease

  • the rentals in the first reference year must not be more than 10% less than the rentals for the next reference year, and
  • the rentals payable in
  • any reference year after the second, and
  • the final year
  • must not be more than the rentals due for the second reference year.

In deciding whether a lease is a short lease, the decision should be taken at inception. In taking that decision, changes that might arise due to variations in interest rates are ignored.

Any other known causes of variation should be taken into account. Variations that could not reasonably be predicted (such as result from tax variation clauses) need not be taken into account.

These rules mean that the rentals payable in the first year may be much higher than those payable in subsequent years and that rentals may decrease by any amount over the term of the lease. In addition, and in broad terms, rentals should not increase significantly at any point during the term of the lease.