In the first article, we looked at the lasting impact Covid-19 may have on retail leases, specifically considering the likely effect on rental provisions, service charge clauses and tenant covenants. There are many common themes with this article, which shines a spotlight on the future office lease, with a particular focus on the length of commitment that office occupiers will be prepared to make and the impact that will have on lease provisions.
The office crisis
Covid-19 has forced large swathes of the workforce to work remotely, which has left many offices empty since the lockdown began. This has compelled employers to question the amount of space they actually need, with a realisation that staff are able to work effectively from home, which allows employees to fit work around other commitments and also has a positive impact on the environment.
Landlords will point to the benefits (both in terms of productivity and wellbeing) of having interaction with colleagues. It is clear that Covid-19 has accelerated trends that were already prevalent in the office market before the lockdown, and institutional landlords will need to work hard to make offices indispensable.
Rent reductions
Aside from rent and service charge suspensions or deferments (discussed in last week’s article), tenants may seek to introduce reductions for any period when offices remain open, but only to certain key workers.
Although this is likely to be resisted by landlords, any such period could be time limited and the reduction could be based on the percentage of staff that are able to access the office.
Service charge
In the short term, landlords of multi-tenanted offices will have to implement social distancing measures at key interaction points in an office building (reception, lifts, kitchens, etc), including the installation of new operating systems in entrances and communal areas to allow users to pass through a building with as little physical contact as possible. As we have seen in the retail sector, there will need to be a shake-up of the list of services to be provided by landlords.
Tenant covenants
- Hours of use: Lease clauses that only allow for 9am to 5pm access will need to be reviewed, with tenants seeking the ability to access their offices on a 24/7 basis, with security maintained at all times. This will be particularly relevant if employers are forced (albeit temporarily) to implement shift patterns.
- User clause: In the same way as retailers have found innovative ways to use their premises during lockdown, office occupiers may need to be able to quickly repurpose ground floor space into commercial or restaurant uses. More space may need to be given over to amenity uses such as bike storage, shower facilities for people running or cycling to work, and multi-staircases to allow one-way systems. User clauses need to be flexible enough to allow this.
- Alterations: The ability for tenants to be able to make alterations in order to implement social distancing measures will be under focus. Employers will have to review the layout of workstations to ensure their staff are confident that when they return to the office they will be safe. This could result in a reported 60% of desks being unusable and raises questions over the sustainability of the traditional office space and, in particular, serviced offices.
Lease duration
- Length of term: Occupiers will be less prepared to make long-term commitments to a specific location and we anticipate a further reduction in the length of the standard lease term, as well as less investment in fit-out works.
- Option to break on pandemic event: Occupiers will meet strong resistance from landlords if they seek to include options to break in the event of a pandemic that results in employers having to close offices. This may be more palatable if the options were couched so that it is only exercisable if the pandemic event happens in the last three to six months of a term, where an office is never realistically going to re-open.
- Conditional break clauses: Occupiers will be concerned that they could be frustrated from complying with break conditions, for example in circumstances where they are unable to pay rent due to a hiatus in business or if they are unable to provide vacant possession because they can’t instruct contractors to remove their chattels and fit out works. A solution would be for break clauses to allow any such conditions to be waived or deferred by landlords for a set period so as to avoid the situation whereby the tenant is unable to comply and the break notice is invalid. We may see more requests for completely unconditional break clauses.
- Alienation: Occupiers are expected to seek freer alienation clauses, allowing them to dispose of excess space before the end of the term of the lease, by either sharing space with other businesses or assigning the lease.
Tenant requirements due to changed working models
Car parking provision may become more important in the office sector as the fear of using public transport acts as a barrier for getting employees into an office. We can expect more supplemental leases of car parking spaces and requirement for contract parking in adjacent car parks.
The final article of this series will explore the impact of Covid-19 on industrial leases, with a specific focus on landlord covenants and remedies for non-payment of rent. It will include some final thoughts on how far reaching changes could be to current lease practice.
Jennifer Ayris and Guy Whitehead are senior associates at Irwin Mitchell LLP. The final part of this series runs next week.
READ PART ONE: The future of leases: retail
READ PART THREE: The future of leases: industrial
