"Working at home does actually work!" is the realisation by many companies during the coronavirus pandemic, with a huge number of employees now successfully and efficiently carrying out their roles from home. This, together with a downturn in business for some industries, or impact on cash flow, has seen a direct influence on the decision-making process when it comes to taking on a new lease, particularly new office space. So what will become of the commercial lease in today's coronavirus economic environment?…
Do we really need an office?
Firstly, let us consider what value an office can add to a business...
Despite the revelation that working from home can (and does) work, we should remember the importance of the office environment. Every business needs its employees to work together as a team to create a productive, efficient and innovate environment. An office plays a huge role in building relationships and morale amongst colleagues, with many employees now working from home reporting that they are also starting to feel the adverse effects such as; loneliness, cabin fever from being in one place for too long, or struggling to maintain a healthy work-life balance. Interacting with other people is a positive aspect of many jobs. Yes, you are there to work, but social contact is also important and can greatly assist with productivity.
Another primary reason to have an office is collaboration. In some industries, the office can feel an easier space to share ideas face-to-face or engage in training with that 'personal' connection, which can sometimes be lost in the virtual domain. This is not as readily available when you are working remotely, you need to catch that colleague when they are online, send an email or schedule a specific phone/video call.
In addition to productivity and efficiency, a designated office can contribute to the value of a company by providing an obvious point of contact for customers both by post and for face-to-face meetings. Flexibility and engagement seem to be increasingly important from both the employer and employee perspective, as is the ability to adapt to an ever-changing working environment as we all navigate towards "the new normal".
Therefore, whilst the "new normal" may see many more of us working from home, or for at least working from home for part of the week, we should not forget the value the office can add to a business.
So, what consequences do we anticipate?
- Existing Leases
Over the course of the next few months, we expect to see an increase in the number of consent applications submitted by tenants to their landlord. This could be from tenants keen to downsize or off-load workspace by way of assignment or underletting, or those wishing to alter their premises to facilitate innovative ways of working to comply with social distancing guidelines.
In addition, some tenants may also seek to vary the terms of their lease either temporarily or on a permanent basis to protect the viability of their business moving forward, for example, payment of rent from quarterly to monthly to ease future cash flow problems.
- New Leases
With fewer businesses willing or able to commit to a lease for the long term, landlords may find themselves forced to be more flexible when negotiating the most important terms of the lease, and may not be able to take the strict blanket approach they were once used to. Below are just a few examples of some of those lease terms where we expect to see a greater emphasis on negotiations between savvy tenants and their landlords when agreeing heads of terms on a new lease.
Term (length of the lease)
In older leases, it was common to see terms in the region of 25 years. More recently, however, that has reduced to between 7 – 10 years. Following the pandemic, we anticipate seeing this decrease even further with much shorter terms of between 3 - 5 years agreed between the parties.
If the parties do agree to a longer-term lease, it will almost certainly include at least one break clause. However, the longer the lease the more likely it is that additional break clauses may be requested. In addition, we are likely to see more tenants requiring flexible break clauses to be included in their leases, as they may be concerned about the possibility of further lockdowns in the future. This may include, for example, a rolling break clause, which allows the tenant to terminate their lease at any time during the term (often after an initial agreed period), and generally after providing a fixed period of notice.
Generally rent is payable notwithstanding any circumstances. We anticipate that tenants may try to negotiate clauses suspending the payment of rent if a situation arises which prevents them from trading from the premises. In addition, tenants may request their rent payment frequency to be monthly instead of quarterly from the commencement of the lease. This is unlikely to be attractive from a landlord's perspective, so we may see landlords moving away from traditional market rent clauses towards turnover leases.
A lease should state who is to insure the property and what is to be included in the policy. A landlord will usually want the comfort of knowing that their property is insured to the full reinstatement value and for any loss of rent, so will generally retain control of the insurance arrangements, with the tenant reimbursing them for the cost of the premium.
Following the pandemic, we expect that tenants may now require the landlord to extend their insurance policy to cover pandemics in the event they are unable to use the premises as a result of a future lockdown. This may prove to be cost prohibitive for some landlords and again there will need to be some flexibility from all parties to achieve a satisfactory position with regards to cover.
If you wish to vary the terms of your existing lease, or if you are thinking of entering into a new lease, it is vital that you receive expert legal advice from the outset of the transaction.
Whatever the nature of the transaction, we are here to help. To find out more or discuss your individual circumstances in further detail, contact us on 01603 693500 or email us using the 'Make an Enquiry' form on our website.
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*This article is provided for general information purposes only and does not constitute legal advice or other professional advice.