The coronavirus outbreak will continue to have a lasting effect on businesses long after the lockdown has ended. The office market has previously been very resilient; however, the COVID-19 crisis has caused employers to review their office environments and could force both swift and permanent changes to how we work, transforming the commercial real estate market.
Companies have rapidly rolled out home-working and have seen just how efficiently they can operate with staff working from home. This has rapidly sped up the progression to this style of working. Businesses are now able to consider new possibilities, for example, hiring remotely in regions where they don’t have offices, downsizing their expensive city centre locations – which they may now be unable to afford – and working to a whole new model.
The financial impact on businesses, combined with increased remote working and the social distancing that will continue for some time, have left many businesses questioning the type and size of premises they really need or can afford. As a result of this, there’s likely be a shift of employers looking to downsize their leases or looking for flexible office space rather than long-term leases, but what are the options for tenants looking to reduce their space?
Options for tenants wishing to downsize their offices
Despite recent legislation introduced by the government to try and give temporary relief to commercial tenants, the starting point for any tenant is that the existing terms of the lease will continue. Tenants are still obligated to pay rent, the lease continues until the end date and all other obligations under the lease continue. Any variation of this position will need careful consideration and most likely also, the consent of the landlord.
Assignment and sub-letting
One option, especially for businesses considering downsizing their premises, is to consider whether your lease allows you to assign or sub-let either the whole or part of the premises. With many other businesses in a similar position looking to downsize or move to home working, tenants may find parties willing to occupy commercial space more difficult to find. However, many tenants will be looking to move once they have an understanding of their post-coronavirus needs and there is likely to be movement in the market. With an assignment, the new party will take over the lease obligations and if landlord’s consent to an assignment is required, you will likely need to demonstrate that the incoming tenant is going to be able to meet the rent and/or act as a guarantor for the incoming tenant. On a subletting, the original tenant remains in place, with a further party subletting all or part of the premises. As such, the information required about the sub-tenant is often less detailed, but if consent is required, the landlord will still want to know that rent will be paid, and lease obligations met. Sharing the premises with another party is permitted under some leases and may, particularly for tenants with other group companies, provide an option of sharing space to reduce the overall rental spend.
Surrender the lease
Another option for a tenant is to approach the landlord regarding a surrender of the lease and possibly even a regrant of a smaller part of the premises. Sending the keys back to your landlord will not surrender your lease and both parties must agree to the surrender for it to operate.
While there is no obligation on a landlord to accept a surrender, there will be opportunities for landlords who were already wanting to take back possession of property or for landlords who are confident in their ability to re-let and would be interested in the potential windfall of a surrender premium. Many landlords will already have had difficult conversations with their tenants regarding their ability to pay rent and may prefer to agree a surrender now rather than wait for the moratorium on forfeiture put in place by the Coronavirus Act 2020 to end and then have to take possession of a property back via peaceful re-entry or court proceedings.
Alterations to premises
Tenants who are looking to stay in their premises may need to consider changes in order to ensure that their workers are safe. For those business where hot desking was key to space management, the practicalities of hot desking are likely to prove difficult, and is not advised by the government, in the short to medium term and may impact on the space required and how it is configured. Social distancing is likely to be part of the new “normal” when the lockdown eases and many businesses will need to consider measures such as internal partitioning and other physical alterations to their premises. Again, tenants should carefully consider their lease before making any alterations to the premises to establish what alterations they are permitted to make and if the consent of their landlord is required. Altering premises without the landlord’s consent where it is required is a breach of the lease terms although, we would expect most landlords to be sensible in agreeing alterations in these circumstances, provided a covenant is given to reinstate at the end of the lease term.
If there is a break clause in the lease, now is the time to review it and consider whether it should be operated. It is essential that tenants take advice on the notice requirements and operation of any break clause. A failure to properly serve a break notice or comply with the required conditions, such as payment of all sums due under the lease before the break date, can mean the break does not operate and the lese continues, which can have devastating consequences for the tenant. For more information please see our blog on break clauses in commercial leases.
This blog was written by Phillip Feather and Sarfraz Iqbal.
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