210: Landlords must be more flexible towards commercial tenants’ needs
With shops, offices and restaurants opening up and positive changes on the way in the UK, there is a need for landlords and tenants to do things differently after COVID-19. We need this in order to kick start retail and the economy, plus to make sure that tenants can run profitable businesses.
The landlord and tenant relationship is beginning to shift as a result of COVID-19 and lockdown. There is now a greater need for landlords to think carefully about tenants’ needs, as well as tenants behaving with consideration towards landlords.
Many commercial tenants have already re-geared their lease rents over the course of lockdown (often in exchange for agreeing to an extension of their leases) or have been granted temporary reduced or monthly rent concessions by their landlords. We are also seeing a move in the market towards shorter leases (or at least leases with regular tenant break options), turnover rents and flexibility in how rental payments are made.
The government is keen to encourage these kind of arrangements. At the start of April 2021, they added further guidance to their ‘Code of practice for the commercial property sector during the COVID-19 pandemic’, including a template form to be used during negotiations by tenants and landlords in discussions concerning rent, rent arrears and on-going lease terms.
In the retail industry – one of the sectors hardest hit by lockdown – landlords are beginning to make bold statements about their aspirations for the future of the industry. For example, Hammerson announced over lockdown that they would look to lower rents, offer shorter contracts and step away from traditional cumbersome rent reviews in favour of a index based / ’omnichannel top-up element’ (such as linking rent to a shop’s halo effect or click and collect) across their portfolio by 2023.
However, Hammerson have since agreed a £330 million sale of part of their retail park portfolio. It remains to be seen whether the incumbent landlord at those particular estates has the same vision. Regardless of the identity of the landlord though, clearly as technology advances, the ability to capture and quantify such metrics will increase and subject to regulatory constraints such as privacy and data protection law, will influence future lease contracts.
We are starting to see bespoke clauses being negotiated in leases to enable this element of creativity and drama to be facilitated by tenants. For example, clauses permitting retail tenants to host entertainment events and enter collaborations with other brands to sell limited edition merchandise, or for restaurants to host guest chef evenings to create a buzz that can be captured and promoted on social media. Brian Bickell, CEO of Shaftesbury, this month echoed this sentiment, stating that landlords will need to adapt to be a ‘little more risk-embracing’ when choosing potential tenants and should get on board with helping occupiers create a ‘buzz and excitement’ in their stores.
Whilst there are positive signs of the market adapting, the reinvention of the traditional landlord / tenant relationship will likely be a gradual process. The backlog of rental arrears and fresh actions now being made by landlords to recover outstanding rents will inevitably mean further hardships before the market adjusts in the longer term.
There is cause for optimism though: as lockdown lifts it is clear that consumers are keen to get back to the shops and pubs and the impact of COVID-19 may prove the catalyst to inspire a more dynamic, flexible approach to commercial lettings.