Associate solicitor Gemma Smith, in leading Thames Valley law firm Blandy & Blandy’s commercial property team, looks at how commercial property leases may change in the future, as a result of the pandemic.
As we are slowly beginning to emerge from the pandemic, we are seeing an evaluation of how things will adapt to a post-Covid world and leases are no different.
Tenants are likely to remain cautious for some time following the pandemic, given the uncertainty and loss of turnover suffered by a great many businesses. In general terms, tenants will be seeking as much flexibility as possible and landlords are likely to have to accommodate this, at least to some extent, in order to secure tenants.
To counter any ongoing uncertainty we are likely to see leases either of a shorter term or with more frequent tenant break options. Where the leases are short in length, tenants may push for security of tenure to give them more certainty of continuity. As to break clauses, tenants may push for limits on requirements to reduce the risk of the break being frustrated. In recent years, we have already seen a move away from the traditional requirements of vacant possession and no breaches of tenant covenants to giving up the property free from occupation and no outstanding rent. This is likely to become even more accepted as the normal position rather than being relaxed even further, as landlords will need to protect their position.
We may see rents move away from traditional open market reviews and a move towards fixed or capped rents and possibly even turnover rents which will put tenants in a better position should difficulties continue, or to guard against future events which cause a significant drop in turnover.
Where landlords do choose to accept a turnover rent which can decrease as well as increase, they will need to protect their own interests and will likely want a base rent that is fixed (possibly subject to open market review) with a top-up turnover rent, otherwise they may want to include landlord break options in line with turnover reviews which will give them options if rent levels fall too low.
Tenants may seek a rent suspension in the lease as further protection against this or future pandemics, for example triggered if non-essential shops are forced to close as we have seen numerous times over the last 18 months. Whether landlords are likely to agree to this will be heavily dependent on how the insurance industry reacts and whether loss of rent cover is available to landlords in these circumstances. Unless insurance cover is available, it seems unlikely that this will be routinely agreed by landlords.
Assignment and Subletting
As part of the general flexibility which will be desired by tenants going forward, they will likely want minimally restrictive provisions allowing assignment and subletting. In particular, requests by tenants for leases to allow subletting of part (something which is currently often prohibited) may become more common as many office-based businesses are seeing a move towards some element of home working. With tenants requiring less space, the ability to obtain a rental income from letting out any surplus will be attractive.
Landlords allowing assignment and subletting should still be careful and ensure they have protections in place. It is important to retain some control whereby the landlord’s consent is required, usually not to be unreasonably withheld or delayed. This will allow the landlord to require details, including financial information, for a prospective assignee. In the case of a sublease, it will allow the head landlord to ensure that the subtenant enters into a licence which will create a direct contractual relationship between them and the subtenant should anything happen to the intermediate lease.