Commercial centres were transformed overnight when the pandemic forced non-essential retail and offices to close. This nationwide shift away from business and retail hubs into the home drove a steep acceleration in online shopping and home working, and businesses were left trying to respond to this rapidly changing situation as best they can.
We first wrote about how this affects businesses that have leasehold property in May 2020 (Coronavirus. Are You Concerned About Office Rent Payments? Here’s Where UK Businesses Stand) and two years later, now that society has reopened, we thought it would be helpful to see how the land currently lies and what the legacy of the pandemic is for the retail sector and office spaces.
Our new how-to guide gives further information on best practices for managing your property portfolio and you can also listen to Episode #4 of TLD Talks where Ed Simpson talks to Commerical Property expert, Client Legal Director, Jo Alexander, and owner of real estate agency, Compton Rose – Mark Nock.
Offices
According to The Office of National Statistics, output/per hour now exceeds pre-pandemic figures, and the FTSE reached its pre-pandemic level in December 2021. Businesses cannot easily now object to home working on productivity grounds. However, it is also not viable for many to get rid of their office properties altogether. Many younger employees, with less suitable home working arrangements and more need for mentoring and support, welcome the return to office life. So, it seems that, for many, hybrid working is here to stay.
With fewer people sitting at their desks every day, many businesses are experimenting with different working models for their staff and reimagining the office space. The social aspect of office life is harder to replicate from home and many employees are choosing to return to the office to do collaborative work. This may necessitate layout changes and we would advise, if you are considering this, that you make sure any alterations are done in accordance with the lease. Although minor, non-structural changes, are sometimes permissible without consent, it is advisable to assume that any alteration requires consent. The improvements you make could even lead to an increase in rent or, worse case scenario, you risk the forfeiture of your lease. If you are unsure about your position, please contact us. And if you are planning on entering into a new lease, we can ensure that your lease accurately reflects your current situation with respect to lease expiry, dilapidations and rent reviews.
Making your office space more attractive to employees is one way in which many businesses are trying to address the issues of employee recruitment and retention. The environmental/ social agenda is also gaining momentum and Mark Nock reports a direct correlation between BREEAM and EPC certification and rental growth. Again, if you need advice about these regulations, please do get in touch.
Retail
The massive growth in e-commerce led to exponential growth in the warehousing and logistics sector, and with the demand for warehousing space outstripping supply, we have seen businesses accepting unfavourable terms to secure property. We would recommend that you gain advice before you sign anything or indeed agree terms. You may be able to build in some flexibility or improvements to the exit clauses even if you are paying a higher rent.
The situation with retail spaces is still rather hard to pin down. Office closures obviously impacted footfall in retail spaces and the increase in e-commerce has seen this market take a hit. Many retailers are probably paying more than the current market would demand and landlords, keen to fill space, appear to be more open to negotiation than pre-pandemic. Saying that, we are still seeing a lot of competition for retail spaces in sought after locations, so if you’re after a prime spot, you should be prepared to pay.
Lease Changes
The pandemic saw many businesses unable to trade and tied to leases that they couldn’t leave. The biggest change we have seen in new leases is the demand for flexibility. Occupiers are looking carefully at the commitments under their leases and questioning what previously had been considered standard requirements. Jo Alexander cites Authorised Guarantee Agreements (AGAs) as a case in point. Where previously tenants would be required to enter into an AGA – an agreement that places an obligation on an outgoing tenant to guarantee the performance by the new tenant of covenants contained in the lease –Jo would now push for a reasonableness test rather than an absolute requirement.
Break clauses are also being given more attention and pandemic/Covid clauses are increasingly featuring in lease agreements. Having been blindsided by the pandemic, tenants are keen to protect themselves against future events and to pre-empt these in the lease from the outset.
To this effect, we are increasingly seeing a move towards a turnover-based rent for retail properties as a fairer approximation of the rent level.
How Can We Help?
We can help you fully understand your property portfolio – what liabilities you have and what your responsibilities are on expiry. We can help you plan for trigger dates like rent reviews or breaks in good time and negotiate new leases that protect your interests.
Your business requirements have no doubt changed over the last couple of years. Because TLD lawyers work as part of your business, we know your ambitions and aims and can support you to align your real estate more closely with your business needs.
Our new Property guide gives more details about how we can help you manage your leasehold property exposure. In the meantime, if you have any questions, please call us on 020 3056 8538 or email on: info@thelegaldirector.co.uk.
