Commercial lease terms - 2019 v 2021: what's changed?

Short answer - not much.  In April last year I took a run at making some predictions as to what changes we might see in commercial lease terms as a result of the pandemic.  With the benefit of a year's hindsight, I thought I would look back at what we've actually seen play out in commercial lease negotiations.

And the simple fact is that the vast majority of commercial leases we are seeing entered into now are on very similar terms to those we would have seen pre-pandemic.

Save for slightly more focus in retail and leisure leases on turnover rent and the "what if" provisions where there is enforced closure, broadly speaking across all sectors the pattern seems to be that once a business has made the decision to commit to some space the terms on which they do so remain the same as those we would have seen pre-pandemic.

That is not, though, to say that nothing will change.  The amount of government support to business over the last year and a half has mitigated the need for immediate and drastic decisions as to space requirements.  Whilst some businesses have committed early to a working model, whether full work from home, full work from office or something in between, most seem to still be working through their long term plans.  As a consequence, we perhaps aren't yet seeing the full impact of the pandemic on demand for space.  In turn, landlords have perhaps not felt any huge pressure to change the terms on which they offer space when they know that their existing terms will sail through any lender or investor diligence process.

That being said, I am going to stick with my main prediction about lease terms - not much will change.  Even as companies restructure their working practices some things will remain true: good quality space will still be in demand and investors and lenders will still want minimal risk.  Those facts will in turn set the benchmark for lower quality space and the terms on which it is let.  Companies seeking genuine flexibility in their office space will continue to have the option of co-working should they want it.

Where we may see more change is in the lengths landlords will go to commercially to secure a strong tenant covenant - in terms of capital investment in their space, inducements and of course pounds per square foot.  It would not be surprising to see the benefit of having a solid tenant on a good length lease term having a greater impact on value, particularly if rates of return on property remain attractive against other options for investors with cash to burn.

So in the end when we come to discussing changes in lease terms in 2022 or 2023, we may well find it all comes down, as it always does, to price.

If you would like more information on Commercial lease terms and the impacts on you and your business, please don't hesitate to contact myself or your usual Charles Russell Speechlys contact. For more information on our Real Estate services click here.