What disclosure for 150 year property lease?

A number of 150 year leases where granted in the 1980s. What disclosure of rent receivable is needed

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A new client of mine granted a number of 150 year leases on investment propetries in the 1980s. The leases do not have break clauses (as far as I can see). The properties are all sub let and the rent payable to my client under the head lease is the higher of a % of rent payable under the sublease, a % of market rent or (in some cases) a minimum amount.

I am intending to account for these leases as operating leases and am struggling with what to disclose in respect of rent receivable < 1year, 2-4 years and > 5 years.

All the subleases have a fixed length (less than 5 years) and known rent but where the head lease include a minimum amount do I really disclose the approx 100 years of this minimum amount that is receivable?

One lease has no minimum amount and simply has the higher of a % of rent payable under the sublease or a % of market rent. If the property is not sublet after the current sublease has ended can I assume that the market rent is zero and therefore the minimum payable after the end of the current sublease is zero? 

Many thanks for your help.

Replies (6)

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paddle steamer
By DJKL
07th May 2020 21:49

I presume FRS102

https://www.frc.org.uk/getattachment/69f7d814-c806-4ccc-b451-aba50d6e8de...(March-2018).pdf

I think you ought to read this part as it possibly sounds on point:

___________________________________

20.1 This section applies to leases, except for:

(c) measurement of property held by lessees that is accounted for as investment
property and measurement of investment property provided by lessors under
operating leases (see Section 16 Investment Property);

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By paul.benny
08th May 2020 09:37

Interesting question. Presumably you're not comfortable with the way these properties were previously accounted for.

As Mr DJKL points out, these appear to be investment properties and section 16 of FRS102 applies. This means that the properties should be fair valued annually but (unless I have missed something) there is no requirement to disclose future lease income as you're suggesting.

I don't want to talk down - but don't forget your company is the lessor, and don't get distracted by references where the reporting entity is the lessee.

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By karon
08th May 2020 10:33

Thanks to both of you.

Yes I am unconvinced about previous accounting disclosures (ie no disclosure in respect of the leases).

They are investment properties and included in the accounts at fair value.

I was under the impression that frs 102 requires the following disclosure by the lessor for operating leases

The future minimum lease payments under non-cancellable operating leases for each of the following periods:
not later than one year
later than one year and not later than five years
later than five years
Total contingent rents recognised as income
A general description of the lessor’s significant leasing arrangements, including, for example, information about contingent rent, renewal or purchase options and escalation clauses, and restrictions imposed by lease arrangements

so similar to the disclosure required by the lessee on the other side of the transaction.

I am beginning to wonder whether the 150 year term pushes the transaction to more of a finance lease arrangement eg the lessee has use of the asset for its economic life but I am also thinking about whether the property and land element need to be split with one element (land) as an operating lease and the property as a finance lease.

Lots of thoughts I'm afraid but no conclusion.

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Replying to karon:
paddle steamer
By DJKL
08th May 2020 11:29

The part of FRS102 I pointed to clearly states that where it is the lease of an investment property the lessor can ignore these banding disclosures as that section of FRS102 does not apply re these.

Edit-and if it does not say this then I have big problems as I am FD of a property investment group, we offer no disclosure regarding the split of leases we have granted broken down into year strata.

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By karon
08th May 2020 11:41

Thanks DJKL - I now understand the significance of your reference and agree that the rental income disclosure is not needed.

In which case I have been wrongly advised by the auditors for another client who required the lessor operating lease disclosure for an investment property. I will enjoy pointing that out to them at the next audit.

Thanks all.

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Replying to karon:
John Toon
By John Toon
12th May 2020 10:18

Not sure I agree with the conclusions reached here. Para 20.30 of FRS 102 details the lessors disclosure requirements. These apply unless 1A is adopted. So any company granting an operating lease needs to disclose the following:

20.30 A lessor shall disclose the following for operating leases:
(a) the future minimum lease payments under non-cancellable operating leases for each of the following periods:
(i) not later than one year;
(ii) later than one year and not later than five years; and
(iii) later than five years;
(b) total contingent rents recognised as income; and
(c) a general description of the lessor’s significant leasing arrangements, including, for example, information about contingent rent, renewal or purchase options and escalation clauses, and restrictions imposed by lease arrangements.

Given it sounds like some of the arrangements in place are complex I suspect b and c above are going to be quite difficult to put down in words! Also, bear in mind the non-cancellable aspect as this is an area often misinterpreted/misunderstood.

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