Fiona Knight, a commercial property associate solicitor at Frettens solicitors, looks at some of the challenges and opportunities ahead for the market
This month’s decision by GAP to close all of its 81 stores in the UK and Ireland and move its business exclusively online highlights many of the issues the commercial property market is facing.
With the increase in consumers moving to online shopping and more and more people working from home as a result of the pandemic, there are inevitable challenges ahead for landlords and tenants of retail and office space.
What’s on the horizon for the commercial property market?
Many of the government’s support measures for businesses come to an end soon, including the furlough scheme, VAT deferrals and the ban on commercial evictions.
The removal of these measures, coupled with the aforementioned market conditions means that a lot of commercial landlords, tenants, and investors will have some big decisions to make in the coming months.
The past 18 months has been the most turbulent time in living memory for commercial property landlords and tenants alike.
The ban on commercial evictions
We can start with the biggest issue in the current market. Commercial evictions are currently suspended until March 2022.
As with the residential equivalent, this measure has been a lifesaver for thousands of commercial tenants, whose businesses have ground to a halt as a result of COVID restrictions.
Many commercial landlords, however, will have received no rental income from some of their sites for almost two years.
As we start to ‘get back to normal’, two main issues will arise:
1. Once landlords are able, should they press ahead with evictions, knowing it may be difficult to find new tenants with the market as it is?
2. Will tenants be able to pay their rent (and any arrears they have potentially built up) and will rates be effected?
The end of support measures
As well as the end of the ban on evictions, many businesses have been supported with the following measures, all of which end soon:
• The furlough scheme (ending in September 2021)
• Business rates relief (reduced in June 2021, ending March 2022)
• Deferred VAT payments (being repaid by many businesses now)
• Coronavirus Business Interruption Loans (interest free period ending soon)
As these measures come to an end, and businesses begin to feel the strain, many will have to decide whether they are able to continue trading. Insolvency and administration rates are very low at the moment, and it is anticipated that these will rise sharply as support measures are withdrawn.
Advice for commercial landlords and tenants as pandemic support measures are withdrawn
Landlords and tenants should be having discussions with each other well in advance of these dates in order to discuss options and make plans.
Although some landlords and tenants have worked collaboratively for mutual benefit during the pandemic, others have had difficult relations. However the opposing interests of landlords and tenants will inevitably need to be balanced to secure an acceptable compromise for both parties.
Landlords and tenants need to fully understand their existing lease terms as well as options for lease variations in the changed market so that settlements can be reached before either side look to terminate leases.
One topic we hear more and more about in commercial property law is turnover rents.
Essentially, a turnover rent is exactly what it sounds like. A tenant pays a percentage of their turnover rather than a fixed monthly or annual fee to their landlord.
It is obvious why this type of arrangement would be attractive for tenants at the moment, but there are advantages to landlords as well, something I wrote about recently here.
All commercial landlords and tenants should familiarise themselves with how these arrangements work, as they will become more common in the next year or so, and will have a bearing on commercial rent negotiations.
We have already seen large organisations like Clarks use turnover rents to reduce their overheads.
Transferring a commercial lease
Some tenants may wish to transfer or reassign their lease, as long as they can find another business willing to take it on.
In most cases, the lease is transferrable with the consent of the landlord, however every lease will be different and will contain restrictions on assigning, subletting or transferring. You can read about this in more detail here.
It is always best to speak to a solicitor or have them review your lease before getting too far into negotiations.
In the early stages of the pandemic restrictions, we had a lot of enquiries about break clauses in commercial leases. Since the introduction of the stay on commercial evictions, this type of enquiry has slowed down, but we anticipate hearing more about this in coming months.
Given uncertainty in the market in recent years, particularly following the financial crisis and then Brexit, break clauses have become more common in leases.
As a tenant, you should check your lease/tenancy agreement carefully or if you are agreeing terms for a new lease, it would be a good idea to negotiate the inclusion of a break clause.
Lease terms are far fairer than they were historically due to legislation and shifts in the market, particularly to shorter leases, but there have never been specific clauses included to cover pandemics.
What if you cannot access or trade from the premises due to government regulations? What if you need to make alterations to the premises in order to be able to operate but the landlord will not agree? The lease is not automatically varied.
Although an evolving area in which a ‘market’ consensus between landlord and tenant does not yet appear to have emerged, both parties need to understand the options available.
Sadly, it seems inevitable that the change in trading conditions and accumulation of rental arrears and other debts will lead to numerous commercial evictions once the ban is lifted.
Whilst we would always support exploring alternative options, such as those set out above, there will be many cases where eviction proceedings are necessary and unavoidable.
In these cases, our specialist property litigation team can offer pragmatic advice on the best way to proceed.
Permitted development and change of use
Due to the changes to normal working requirements and the potential reduction in the need for traditional office space, landlords could use permitted development rights to develop their property or change the use to facilitate a different type of business or housing.
Permitted development rights allow certain changes to take place without requiring a full planning permission to be obtained. You will still need to apply for prior approval, but this should be an easier and quicker method, than a traditional planning application.
This is hugely beneficial in today’s marketplace, when tenants are looking for more flexibility. These changes can also relate to office use being changed to residential, which means an underused office can prove to be very valuable when converted.
With a shortage of housing stock and a potential surplus of commercial property, it seems an inevitable consequence that many landlords and investors will be exploring these options.
Advice from a commercial property specialist
Whether buying or selling, or granting or taking a lease of commercial property, it is a complicated area and even more so if the relationship breaks down.
Whilst the focus of any business has to be its day to day operation, where physical space is required, decisions made relating to commercial property have substantial and long term effects on the overall health of any business which the pandemic has emphasised even more.
Early, specialist and commercial advice is critical in a fast-moving world so that you can make the best decisions for your business.