There is no denying that the impact of Covid 19 has had a substantial impact on the commercial lettings market over the last six months, but life still goes on, and whilst substantially more of us are working from home than ever before there is arguably still a need for a central ‘hub’ for most office-based industries. Manufacturing and storage and distribution industries still require the same (if not larger) premises from which to operate and retailers still need premises with consumer footfall from which to trade.
So, how has this impacted the process of lease negotiations? We are no longer seeing leases at a length of 10 years or more (except in rare circumstances) with Tenant’s opting for shorter, more flexible letting options which allow the ability to use the premises in the way that meets their 5 year plan, whatever that might mean.
But there are other matters that a tenant may wish to consider when negotiating a new lease (or even a renewal lease for that matter if they aren’t bound by the existing terms) which could offer greater degrees of flexibility and financial comfort in the event that we have to endure further restrictions as a result of the ongoing pandemic.
Break Clauses
So asking for a Tenant only break isn’t anything new. However, whereas one would often have a single fixed tenant only break in a short term lease, we would urge Tenants to consider asking for a rolling break clause which can be exercised at any time during the lease term or after a fixed point (for example, the right to break at any time after the second anniversary of the lease commencement date in a five year lease, on not less than 6 months’ notice). Alternatively, a Tenant could even consider requesting a break clause exerciseable at any time during the lease, but with a longer notice period, e.g. 12 months.
When drafting a break clause, it is important to ensure that the conditions attaching to the break clause are as fair to the tenant as possible and should only ever be limited to payment of the headline rent and ensuring that there are no continuing occupiers at the break date. This is in line with the RICS guidance set out under the Code for Leasing Business Premises 2020.
Flexible Alienation provisions
With the rise in popularity of flexible office leases and pop up shops or concession arrangements, a Tenant may want to give some thought to whether any of the demised premises could be let out on flexible arrangements during the term of the lease if all of the demise isn’t being used. This has the dual benefit of generating a revenue for the principle tenant and potentially bringing new customers to the Property. The flexible lettings could be by way of fixed short-term leases (contracted out of the Landlord and Tenant Act) or licences but our advice would be to get this agreed at the date your principle lease is granted and you could even agree the form of short-term lease/licence within the principle lease so everyone knows where they stand.
You would need to verify that any potential sub-tenant or licensee wouldn’t be in breach of any planning legislation for their proposed use and monitor any fixed term periods to make sure they didn’t run over.
Turnover Rents
It might be worth asking a Landlord to consider agreeing to a Turnover rent review clause, instead of the standard upwards only RPI or open market rent review clauses. That way, the Landlord and the Tenant base the rent on the actual performance of the business and should the business be affected by an economic recession then this is reflected in the rent at the review date, meaning the rent could go down as well as up. However, these clauses are only of real value where there are annual rent reviews otherwise the benefit could be lost if the Tenant’s business recovers before the rent review has come into effect.
Specific Covid Rent Cessation clauses
The Coronavirus Act 2020 effectively suspended the right for Landlord’s to forfeit for non-payment of rent during the pandemic and is set to remain in force until 31st December 2020. If your lease extends beyond this period then you may want to consider requesting a specific rent cessation clause in the event that government guidance prevents the property from being occupied. The wording would need to be specific depending on the permitted use, as arguably the majority of office staff could continue their work from home and the revenue of the business would be largely unaffected.
Equally, if your premises lease is within a shopping centre, for example and the government forces a closure, you should definitely be seeking a clause which provides that rent will be suspended together with service charge payments for the duration of that closure.
Keep open covenants
Although unusual in standalone leases, you may find that the Landlord requires a specific tenant covenant to keep the property open (and trading). If future government guidance provides for businesses to close then a tenant may find themselves in breach of this obligation and we would therefore recommend that the obligation is removed or a concession included specifically to cover future lockdowns.
It should be noted that some turnover rent clauses contain a penalty for failing to adhere to the keep open covenant so care would need to be taken to ensure that the lease was drafted so that this penalty ceased to be of effect where the failure to keep open was a result of government advice.
Flexible User clauses
Whilst all permitted use clauses are intrinsically linked to planning legislation, we would always advise tenants to try and secure as flexible a user clause as possible. This can usually be achieved by adding words whereby if you request consent for a change of use, the Landlord cannot “unreasonably withhold or delay consent”. Any change of use would need to be considered in the light of the planning use assigned to the property and an application for change of use may need to be made to the Local planning authority. We would also recommend ensuring that the lease did not impose any unreasonable restrictions on the Tenant applying for planning permission.
In summary, in an uncertain time it is beneficial for Tenants to secure the best possible terms in their leases for the future, to allow them the greatest change of achieving success in their chosen premises. If you would like specific advice on negotiating a commercial lease then please contact Rebecca Cleal, Senior Associate by emailing RCleal@prettys.co.uk or calling 01473 298250.
