'Nightmare' ahead as firms declare leases

Firms that have long 25-year leases on their premises will no longer be allowed to record that liability on a year-by-year basis under proposals set out by the International Accounting Standards Board. Instead, they will have to declare the whole 25-year liability, meaning their balance sheets will be far more heavily geared.

Accountants fear this could have serious repercussions for companies which are already sailing dangerously close to their banking covenants.

It is also likely to encourage shorter leases in the commercial property sector, creating problems for developers who rely on pre-letting office or retail space on long leases to attract funding for their projects.

Mark Hoskyns-Abrahall, a partner at PricewaterhouseCoopers (PwC) called the accounting standard, currently in draft form, a "complete and utter nightmare".

"The implications are very significant especially if you think about retail companies. They are all of a sudden going to have to put a huge asset on their balance sheet but also huge liabilities. Companies are having to think what consequences that might have for banking covenants for example. Some of the bigger owners of shopping centres will see significant changes in the conversations they have with tenants."

Nick Naddell, head of property at law firm Burness, said the banks will have to take a sensible approach towards the rules and help companies re-word their covenants so they aren't all of a sudden in difficulty. Accountants estimate the standard could come into force as early as next year.

Naddell said: "The banks will have to work around it so they can still find ways of lending to people. I don't see that the property sector will grind to a halt if, effectively, the colour of the paint you are using has changed, but the vast majority of businesses with leases are not alive to it yet."