The Future of Commercial Leases in a Post COVID-19 World – Part 2
This is the second article in our series that explores what commercial landlords and tenants might expect from future commercial leases in light of the COVID-19 pandemic. Please click here to read part 1.
Shorter terms or more frequent break clauses
Many tenants will find themselves having committed to long term leases with infrequent, if any, opportunities to end the lease early without having to pay a hefty premium to the landlord for the privilege.
In light of this, we may see a move to shorter-term leases, or longer-term leases with more frequent break options. Rolling breaks may also become more prevalent, where leases are terminable following service of notice from one party to the other at any time.
In the case of turnover leases, landlords may also seek to benefit from a break option, so that they have the flexibility to bring the lease to an end if rents are too low. For any lease, this would be worth considering now in light of the restrictions on landlords taking possession of a property (although finding a new tenant may prove a greater challenge than pre COVID-19).
If agreeing to tenant-break clauses, landlords should ensure that tenants are required to pay all rent and other sums due under the lease as a condition of the exercise of the break.
Most commercial leases restrict sub-letting of part, but this is likely to become more attractive, particularly to tenants that occupy offices.
Many office-based businesses shifted to home working during lockdown, and are now looking to make long-term changes to reduce outgoings. Even if this is not the case, the reduced numbers permitted in office space for the foreseeable future could lead to a space not being utilised as efficiently.
Landlords will need to think carefully about what conditions they need to impose before consenting to a proposed sub-letting of part, and what parts of the property they are prepared to allow to be sub-let.
The wide-ranging legislative measures introduced to protect tenants from the consequences of non-payment of rent have left landlords with very little in their armoury.
Consequently, landlords may seek to take more precautions in the future to maximise their ability to recover rent. This is likely to take the form of rent deposits or guarantees, or landlords requesting both, where previously one would have sufficed.
Rent deposits are usually equivalent to 3 – 6 months’ rent, but it may be that we see rent deposits for up to 12 months’ rent being requested. Landlords may also request guarantees from multiple directors of the tenant where, pre COVID-19, one might have been acceptable.
These additional protection measures might be seen by landlords as a fair ‘quid pro quo’ for the myriad measures in favour of the tenant as discussed in our previous post.
These are just some of the changes we might expect to see in these unprecedented times. The pandemic has highlighted a need for greater flexibility for commercial tenants and this may manifest itself in many different ways. However, landlords will seek to protect their investment and what is clear is that they also have a range of tools available to them.
If you would like advice on your particular property, please contact us to discuss how we can help you.
The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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