Office Spaces: a time to review?
Many office-based businesses, along with those in other sectors, will of course be understandably principally concerned at the moment with the health and wellbeing of their employees and the immediate outgoings of the business such as wages, rent and business rates. However, it’s an unfortunate fact that, although it may feel like time is standing still, in fact time marches on and 2020 rent review dates are being reached. These review dates will have been put into leases usually 3 or 5 years ago at a time when no-one could have possibly imagined the scenario we find ourselves in now when the commercial office market is in very different circumstances. So, at a time when many businesses are looking to control their existing costs as much as possible, some may find themselves unexpectedly facing rent reviews and proposed increases.
Of course, in the office market the vast majority of rent reviews will be upwards only so there will be no prospect of rents reducing (other than by special negotiation with the landlord outside the terms of the lease). At first glance it might seem that in the midst of all this chaos, with workers being ordered by the government to work from home from 23 March and some already doing so from around 16 March, there would be no prospect of rents increasing either, but that may not necessarily be the case.
The first thing to consider is the rent review date itself. This will be a specific date set out in the lease and, as there is often no requirement to trigger the rent review on that date itself, if your business receives a rent review notice now, it could well be in respect of a rent review date which fell several weeks or months ago. Strictly, an assessment of the market rent level on a particular date is to take into account the market on that date itself, not with the benefit of hindsight an assessment of the market taking into account factors which changed significantly shortly afterwards. It follows therefore that an assessment of a rent review at a date in January or February 2020 could produce a very different figure from one in late March or April 2020.
However, whatever the review date, valuers for either party would in the usual course of events use transactions around or shortly after the review date itself to evidence the level of the market for that premises at that time. As transactions slow or pause during this lockdown phase, both parties may struggle to find evidence for their preferred assessment of the rent level. Where there are transactions, these may not all be the traditional transaction of a tenant taking new space. At the present time, businesses may be finding they are needing a smaller workforce and therefore less space. Office tenants may wish to review their own space requirements for their business following both a (hopefully temporary) slowdown in their business itself and the success of enforced home working, which may well lead to a more permanent change.
Instead, where tenants have an upcoming break date or term expiry, landlords may wish to work together with tenants to either reduce their space, reduce their rents or provide cash incentives to stay. Any or all of these measures put in place now with other occupiers in the vicinity may well have an effect on rent review that could help a tenant faced with a current rent review in arguing for a lower figure than that proposed by the landlord.
Lastly, take advice on the specific wording of the rent review clause itself in the lease. For example, can this kind of enforced shut down be taken into account on rent review or does an assumption as to lawful use go far enough to permit the landlord to ignore the current upheaval? Individual leases will have different wording and different considerations.
In all cases, if you are facing a rent review in 2020 do take advice both from a rent review surveyor and your legal advisor.
This article was written by Sarah Morley. For more information please contact Sarah on email@example.com or +44 (0)20 7427 6417 or another member of Charles Russell Speechlys’ office occupiers team..