Commercial Property Bulletin 2

Every cloud has a ……………….

Pandemics and recessions demand creativity, a principle that applies as much to commercial property as it does to all other areas of business.  The usually slow moving world of commercial property has adapted to the new challenges with surprising speed, sometimes by harking back to lessons learned from previous recessions, but also by coming up with creative new ideas.

Landlords are needing to be far more flexible in their approach to leases, particularly at a time when business plans are more likely to concentrate on the next 12 months rather than five years – and when tenants are unlikely to want to commit to a 10- year institutional lease.   There are, however, ways that landlords can attract and retain tenants, of which more later.  

Tenants, on the other hand, find themselves in a stronger negotiating position during a recession and should be able to obtain concessions which would normally be rejected.  Some of these concessions will be short term measures, such as deferment of rental liability or a rent free period, whilst other can be for the long term such as a full renegotiation of the lease terms.

Even before the pandemic struck the trend had been moving from quarterly payments in advance to monthly payments as this allows for better control of cash flow for tenants.  This is particularly so in sectors such as retail or hospitality, which are often heavily reliant on seasonal trading.   That trend has now accelerated into other sectors, such as offices and warehousing.  Landlords are tending to take, if not a supportive stance, then certainly a pragmatic one when faced with a tenant’s request to move away from quarterly rental payments.

Asking for a reduction in rent, particularly if temporary in nature, is also a possibility and should be explored with a landlord who would rather get some rent than none at all - or worse be faced with an empty unit, a business rates liability and no rent coming in.

Some landlords are agreeing to use rent deposit monies as rent, although they will of course be able to ask for the rent deposit to be topped up at a future date and this should therefore only be treated as a short term fix.

Another option would be to look at other outgoings, such as service charges and buildings insurance premiums, and consider whether asking for these to be capped, or even waived, would be possible.

Do you need as much space as you presently have or would giving up part of the property be a possibility?

As with all of these suggestions, it is really a matter of approaching the landlord and seeing how flexible they are prepared to be.  

Moving on now to the options available for landlords, these can include considering pop up arrangements where the tenant will take a unit for a short period or possibly for a longer period, but with regular or rolling tenant break options.   Even a short term lease will help a landlord avoid business rate liabilities and could also lead to a longer tenancy being granted on favourable terms.

Allowing a tenant to diversify in order to make the most of the space it has is another option that should be considered favourably where possible.   Once again, this is something that was becoming more common prior to the pandemic and has accelerated of late.  Could a craft shop or a cafe be allowed to run classes, for example?

The pandemic has led to an increase in working from home in the office sector and some businesses are looking to downsize.  In many cases it would be far more sensible for a landlord to consider accepting a surrender of part of the leased premises, particularly where there is an upcoming break right which a tenant may wish to exercise.

Allowing tenants to share their space with other users is another option, but this will need careful consideration and legal advice to ensure that secure subleases of part are not created by accident.

Faced with a tenant wishing to renegotiate the terms of a lease, landlords could also take the opportunity to ask for concessions from the tenant such as bringing forward a rent review or asking the tenant to forego a break right.   A landlord should take a fresh look at the lease, think about what they conceded during the original negotiations and what they would like to be included in any revised terms.  Will a tenant wishing to downsize need as many parking spaces and, if not, could these be taken back and let to other users?

Landlords should be wary of agreeing concessions which could result in a loss of value in their investment.   Having said that it should be borne in mind that occupied premises, even if let on less favourable terms, are usually more valuable than empty ones.

When agreeing a concession, a landlord should consider whether it will be necessary to obtain its lender’s consent to the change.   Where the variation is only temporary in nature this may not be required, but if it is to be longer term then there is a risk that the change would put the landlord in breach of the terms of its mortgage and the lender should be approached before the concession is agreed.

Thought must also be given to the position of a tenant’s guarantor and care must be taken to ensure that the guarantor’s obligations are not waived by changes made to the terms of the lease.   The general rule is that the guarantor would need to be a party to the documentation effecting the change, but legal advice should be sought prior to the landlord and tenant simply making the changes.

Finally, whether you are a landlord or a tenant we are here to assist you. We will be happy to discuss the options available and the pros and cons of each of them. We will also prepare secure and sensible documentation to put the changes into effect. 

If you or someone you know requires legal advice or has a question regarding Commercial Property, call us today on 0800 999 4437 or email and take advantage of our complimentary initial consultation via telephone or video call.