In-office working - where are we now? Insight from Harrison Clark Rickerbys

By Kirsty Muir

6 June 2022

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“We need commercial landlords and occupiers to innovate, creating productive spaces for today’s landscape” – was one of the conclusions of our Future Workspaces campaign. A year later, has this approach evolved?

Morgan West, real estate partner at our Cheltenham office, addresses key themes and questions currently being asked in the commercial property sector.

Empty seats in the office – what does this mean for commercial landlords and tenants?

Let’s start with tenants. If less of your workforce are going in everyday then there’s no need for as much space. You are then looking at your lease to see when it ends or if there’s a break clause you can activate. The problem is there is always a fear that some days, there may be more in the office than others. The pattern seems to be that Mondays and Fridays are quieter than Tuesdays -Thursdays. It is therefore key to assess working arrangements to make the most out of your space; adopt hot-desking or invest in dual-purpose furniture for a more cost-efficient, collaborative and functional workspace – especially when core office space is at capacity.

The needs of commercial tenants have changed, and landlords need to keep up with this. Failure to do so will likely result in them struggling to attract occupants in future. Landlords may also find more flexible arrangements are required. This may range from a common area that multiple tenants can book when needed, to those seeking rolling breaks or a shorter lease term with an option to renew. Agreeing rolling breaks or shorter lease terms may not seem particularly appealing to a landlord but there are ways that this can be rentalised i.e., introducing a penalty on exercise of a break. Generally, the longer the term that a tenant can agree to, the more bargaining power they have when it comes to reducing the rent. From a landlord’s perspective, it makes sense to reserve the benefit of a higher rent where the term is cut short.

A recent example of this is where a landlord and tenant had agreed on a lease renewal to increase the rent by 10% over a five-year term but where the tenant broke early, a further 5% would become due. This was considered preferable to an initial one- or two-year term at 15%.

What common trends are you seeing right now?

Turnover rents and flexibility are the two most common trends. Instructing a solicitor is crucial, as poor drafting could result in a dispute down the line. For example, I recently acted for a landlord who asked me to review the turnover rent provisions contained in a lease so that they could exercise a rent review. Multiple terms were not clearly explained and those that were, were inadequate i.e., ‘turnover’ did not include online sales. The rent review mechanism was therefore unworkable and my advice was to tear it up and start again. Unfortunately, a landlord’s negotiating power is comparatively weaker at this point and even the most amicable landlord and tenant relationship can become strained when discussing what each thought had been agreed on grant.

When it comes to break clauses, I will always advise clients to consider a shorter term with an option to renew as an alternative, because - from a stamp duty land tax (SDLT) perspective - it is more tax efficient. Understandably, tenants tend to prefer the comfort of knowing that a length of term is secured without the risk of missing a deadline to serve a notice to renew, but it is still my duty to give them all the facts to make the decision they feel is best.

What advice would you give to both landlords/tenants dealing with new ways of working?

The single most important piece of advice is to speak to one another and be receptive. A positive landlord/tenant relationship where the landlord can cater to their tenant’s needs is much more likely to result in the tenant succeeding and renewing at the end of the term.

There have been seismic changes to many working practices since the pandemic; a proactive landlord who engages with their tenant and ascertains how their business needs have altered is much more likely to be able to assess the practicality of their premises. Engage with your tenant(s) as to how their space can work better for them, agree any alterations and even agree to share some of the cost.

Tenants are much less likely to resist a hike in a service charge where they see the benefit of the works undertaken and believe works are being tailored to their own needs - even more so where the landlord has agreed to cover some of the costs. An investment by the landlord may reap benefits in their ability to rent the property in future - especially where they have received endorsement by previous occupants - and the level of rent they can demand.

If you are a local business in need of commercial property advice, HCR can help.