The commercial lettings market has been substantially impacted by Covid-19, whether as a result of forced closures, pandemic regulations, a drop in footfall or companies embracing the ‘working from home’ culture and questioning the amount of space they actually need. So, how has this impacted lease negotiations?
There are a number of matters for landlords and tenants to consider when negotiating new or renewal leases, which could offer more flexibility along with financial security as we enter the next phase of recovery from the pandemic, or in the event that lockdown restrictions are imposed again.
Length of term
Tenants may be less prepared to make long-term commitments to premises and are increasingly opting for short-term leases (ten years or less) or for longer leases with break options.
Rolling break clauses are break options which can be exercised either at any time during the lease term or may be exercisable after a fixed period of time, for example after the second or third anniversary. Previously, short-term leases often contained a single fixed tenant only or mutual break option, but rolling break clauses are becoming more popular with tenants.
From a landlord’s perspective, rolling break clauses could be considered in lease negotiations in exchange for a longer notice period, for example twelve months instead of six months.
Tenants exercising their break option should consider their ability to comply with break conditions. For example, leases will require all sums due up to that point to have been paid in full, which in itself may be challenging from a cashflow perspective. Leases may also require tenants to remove fixtures and fittings from the premises and reinstate the property to its prior state. Tenants should consider the availability of tradespeople to carry out the necessary work if Covid-19 restrictions return.
Flexible alienation provisions
Tenants are looking more carefully at alienation provisions in a lease. They may seek more free alienation clauses which allow them to dispose of excess space before the end of the lease term by either sharing space with other businesses or assigning the whole or part of the lease.
While it’s useful for a tenant to have flexibility in alienation, the landlord will want to retain control as to who the lease is assigned/sub-let/licensed to. This is to ensure that the obligations under the lease will be fulfilled. Often the agreed form of sub-lease or licence will be included within the lease. It is also usual for the landlords to impose conditions before providing their consent, such as requiring an assignee or sub-tenant to be of sufficient financial standing.
Flexible user clauses
Retailers have found innovative ways to use their premises during lockdown and adapt to changing client bases as restrictions have eased. Tenants may want the ability to quickly repurpose space or may need more space for amenities so they will require user clauses to be flexible enough to allow them to adapt.
User clauses are intrinsically linked to planning legislation. However, flexibility can be achieved by allowing tenants to apply for a change of use or to allow a wider range of uses within the property’s permitted use class.
Pandemic clauses (or force majeure)
Tenants have sought to invoke force majeure clauses during the pandemic to excuse their non-performance of covenants, such as failing to pay rent. Some leases now will expressly include or exclude pandemics, public health emergencies or forced closures due to these events, from being force majeure events. Following Covid-19, landlords and tenants will pay greater attention to force majeure clauses, with tenants likely to try to seek rent relief for certain pandemic-related events – to which landlords will be reluctant to agree. The courts have recently considered pandemic clauses in leases for Poundland and W H Smith.
Other changes we are seeing:
- Desk-sharing licences
- Flexible alterations clauses to allow implementation of social distancing measures
- “Keep open” covenants (to keep property open and trading)
- Changes to service charge provisions as landlords increase “deep cleaning” services and implement social distancing safeguards
- Rent reviews linked to turnover
In uncertain times both landlords and tenants will want to take care to secure the best possible lease terms during negotiations for new and renewal leases.