Partner John Dingle, in our Commercial Property team, discusses the future of the office and looks at how both landlords and tenants can protect their interests whilst taking advantage of the opportunities.
According to former transport secretary, Lord Adonis, the "Death of the office is massively exaggerated" and "Most people can't wait to get back to the office."
Lord Adonis suggested that “there is no reason to believe that once the pandemic is over, life won't return back to normal” during a live news broadcast on the same day that construction began on HS2.
Of course, landlords and tenants may choose to adopt a more cautious position than his clear optimism over the future of the office, at least in the short term.
79% of respondents to a recent Royal Institution of Chartered Surveyors’ (RICS) UK Commercial Market Survey said that demand for office space had fallen during the second quarter of 2020. 93% also predicted that occupier space requirements will decrease over the next two years.
Research conducted in partnership with consultancy Leesman highlighted that almost 80% of employees said that working from home boosted their productivity.
The ongoing situation clearly offers differing opportunities for landlords and tenants. On one hand, a reduction in demand may allow occupiers to negotiate more favourable rents and terms. Whilst landlords and investors with distinctive and contemporary offices located in and around the Thames Valley may be well placed to benefit from tenants who are reassessing their needs and consolidating, ‘downsizing’ or relocating to the region, such as from London.
A report by Savills in June this year found that 89% of workers still believe that the office plays a key role, but that office designs, and how they are used, needed to evolve.
According to a RICS article published in 2019, “future proofed” workplaces will have planned for technological advances, been designed with employee wellbeing and productivity in mind, be “green”, provide a clean and modern feel and adopt a forward thinking outlook.
So, given the above, what steps can landlords and tenants take so that they maximise opportunities?
A shorter and more flexible lease term will be a clear occupier focus, so as to enable tenants to better respond to business need during an uncertain time. Landlords who are willing and able to offer a shorter term, as well as a tenant break, will be well placed to meet that need. Tenants are advised to ensure that any right to break should be as unconditional as possible – whereas a typical landlord requirement is that, in order to successfully trigger a break, a tenant must comply with various conditions such as to pay all monies due, yield up with vacant possession, and comply with all other lease covenants, all of which presents a number of pitfalls for the unwary and in some cases may be extremely difficult to achieve at all.
Rent and other costs
Clearly the amount of the rent will be key for tenants seeking cost certainty, and as always we would strongly advise that landlords and tenants seek advice from a surveyor to ensure that the rent – and any concessions, such as rent free periods – reflect the market. Turnover rents are making a name for themselves in certain sectors, such as retail and restaurant premises and, whilst not necessarily applicable to the office market, perhaps show that the landlord who is able to be innovative and flexible with its rental structures may prove more attractive to prospective tenants who are keeping an even closer eye on their financials.
Tenants also typically face a raft of other leasehold costs, such as service charge, insurance rent, business rates, and utilities, and a landlord who is able to offer an inclusive rent/cost package may find its stock rising in a world where overheads are more important than ever.
Tenants will likely be keen to ensure too that their lease builds in the ability to assign, sublet or share occupation, so as to retain flexibility in the event of a change in tenant need. Can the lease be sold on to a third party, and does the tenant have the ability to sublet or share space and therefore share in the occupational costs? The ability to surrender back part of the premises during the lease term – whilst meaning some additional work and cost prior to lease completion to cater for a possible future surrender – may also be attractive to a tenant; the tenant is able to reduce its footprint and costs whilst the landlord retains its tenant and income (albeit reduced).
Quality and safety
Flexible and cost certain lease terms will be more attractive than ever, and landlords able to offer those terms will find more opportunities than those who will not or cannot, particularly when allied to office space that meets the demands of the modern tenant for a quality, efficient, green, tech-enabled, and employee-focussed space. Despite the comments and statistics referred to above, the increase in home working is clearly here to stay, which will inevitably lead to reduced demand for office space.
Offices must also however be able also to meet the needs of a tenant and its workforce in the pandemic era. Hot desk arrangements – whilst placing downward pressure on floorspace need – is not necessarily an effective solution in a Covid-19 world. The fall-out from the pandemic may therefore act to counteract that downward pressure to an extent.
A landlord’s response to, and the cost of, a pandemic related incident – such as a further lockdown or an infection in another part of a multi-let building – will be another key question. How will a landlord safeguard each tenant, and how will the cost of a lockdown or additional cleaning be apportioned? Landlords able to offer clear policies and outcomes will stay ahead of the curve.
Both landlords and tenants should take advice from a surveyor as well as legal advice before proceeding to ensure that their interests are protected.
For further information or legal advice, please contact firstname.lastname@example.org or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.