Commercial leases – the new normal?

Posted: 21/05/2020

The commercial lease has traditionally been a relatively inflexible document, with the concept of the “institutionally acceptable lease” an important part of the UK property investment market in order to retain or enhance the value of the freehold reversion. They are generally entered into on standard terms and remain unchanged throughout their period of operation, which is often at least a decade. However, as we near week eight of lockdown, it is worth reflecting on a couple of emerging trends we are seeing which look set to reshape this previously accepted doctrine.

The first, and most obvious, is the catastrophic impact of Covid-19 on the retail sector. With most shops suffering from greatly reduced sales and the government restrictions on forfeiture, the use of Commercial Rent Arrears Recovery (CRAR) and winding-up petitions reducing significantly the options to landlords to deal with non-payment of rent, many landlords and retail tenants are coming up with their own compromise arrangements. These include payment holidays, rent deferrals and switching to monthly instead of quarterly rent payments, often in exchange for removing break options or extending lease terms by way of reversionary leases. The idea of significant numbers of landlords agreeing to these sorts of variations before the current crisis would have been almost unimaginable. Even despite the well-documented issues the High Street has faced over the past few years, there has been nowhere near this level of flexibility or willingness to find solutions to keep retail businesses afloat.

The second is the realisation by many companies that working from home can actually work. Huge numbers of office-based staff are successfully carrying out their roles from home and we have seen this, together with pressures on cash flow, have a direct impact on decision-making when it comes to taking new office space. Many prospective tenants are either withdrawing from transactions altogether or looking to reduce the agreed rent or floor area or at the very least, considering a redesign of their current interior design. Of course an office has more value than just somewhere to house desks, and socialising with colleagues and building relationships in person has huge significance when it comes to retaining staff and getting the best out of people, but it seems inevitable that office life as we know it is going to change. The “new normal” may see many more of us working from home for at least part of the week and businesses needing to re-configure their existing office space to accommodate social distancing requirements.

We anticipate that one consequence of both of the issues discussed above will be a greatly increased number of applications for consent under existing leases, be they from tenants keen to offload space by way of assignment or underletting, or to make alterations to their premises to facilitate new ways of working. Both landlords and tenants should remember the basics when dealing with these applications, as the statutory regime which sits behind them continues to operate.

Tenants should make a formal application at the earliest possible opportunity and ensure it is served in accordance with the notices clause of the lease. An email to the managing agent will not generally start the clock running for the purposes of arguing that a landlord has unreasonably withheld or delayed the giving of consent.

Landlords should acknowledge receipt of applications and deal with them promptly. The usual rule of thumb of no more than four weeks from receipt of the application to the grant of formal consent by way of licence remains a useful one. If refusing an application, a decision should be given in writing and should set out the landlord’s reasons.

At the point of renewal or taking new space, tenants are also likely to be conscious of the desire to avoid making a number of expensive consent applications during the life of a lease and so we expect to see much more negotiation of the terms of the alienation and alterations provisions. With a smaller number of businesses willing or able to commit to a property for the long term, landlords may find themselves forced to concede these points in a way they would not have done before. Flexibility may just become the new normal in commercial leases and the institutional investment market will need to take heed and adapt.

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