The Future of Corporate and Commercial Rental Contracts

Business Insights
04/11/2020 09:41:00

From remote working to socially distanced production lines and masked hospitality staff, our physical working environments have undergone exceptional changes. For any business owner right now, the requirements of a workspace are something that should be reflected in the rent.

At the beginning of state-imposed lockdowns, many businesses tried to negotiate contracts if they couldn’t trade. But with many changes set to stay beyond lockdowns, the next hurdle is more nuanced than crisis management. The future of our corporate and commercial rental contracts may be rewritten. What can your business stand to gain?

Unprecedented times (not) at the office

Seven months in and we’re starting to see the long-term impacts of COVID-19 and social distancing. Working from home isn’t just a phase – we’re in this for the long haul. Many of us are now used to the home office.

In September, a survey from the Institute of Directors found that more than half of executives are intending to allow staff to work from home more permanently. Nearly three-quarters said they would encourage more remote working after the pandemic. The question that many directors have been asking themselves for seven months is, ‘will we need the same space – and can we justify the same cost?’ It may not be the death of the office, but our needs have changed and don’t look likely to reset entirely.

Our offices might need to be smaller but they must be better

Development and networking are important benefits of shared working environments. Better designed office spaces will persuade staff to return if they feel comfortable and attract new talent. If employers can also prove that their spaces are COVID-secure, potentially investing in regular testing, employees are more likely to return.

Early reactions and discussions around rental negotiation were reactive crisis management. Now businesses must think carefully about planning the future. Without a vaccine it seems unlikely that our day-to-day will change much – so how should rent contracts?

If your contract is due to expire you may have serious doubts about extending. Right now is the perfect time to voice these to your landlord and work out exactly what you need. If that means scaling back the number of desks or floors you rent, now is the time to negotiate.

“Pandemic clauses”

The retail industry has been one of the hardest hit, with rent a huge issue for many businesses. Taking on new sites, renegotiating existing terms or considering break clauses has been paramount. Introducing “pandemic clauses” could help by providing innovative guidelines for rental payments.

These clauses stipulate that rent payments will be reduced if they’re forced to close. Edinburgh Woollen Mill inserted pandemic clauses into its new leases during the lockdown or similar events, as did Amazon. For many, the most likely agreement between tenant and landlord is that rent halves during a period of forced closure.

Some leases taken on by companies such as Hammerson and British Land are being drawn up based on turnover. For businesses paying a percentage of monthly sales instead of flat rate, like the multibillion-dollar retail development in New York, Hudson Yards, the attraction is obvious. Tech companies have even started making software for profit-sharing rent models.

Any business, whatever industry, could consider something similar. Ultimately, tenants are asking landlords to bear part of the risk. Whether this aligns with their own financial commitments and insurance policies is another matter, and requires a lot of record keeping on the landlord's part. If your landlord isn’t open to discussion, and rent during this uncertainty is impacting your cash flow, then it’s wise to look into fee and interest-free CBILS lending before the 30 November deadline. At MarketFinance we offer quick and easy solutions to cash flow problems.

Change must be collaborative

If landlords accept flexible rent terms and pandemic clauses, they need support from lenders, insurers and (during the pandemic) the government to make sure they don’t cut off their supply of cash. Even rent based on a percentage of revenue is tricky for landlords as their lenders are likely to be conservative in evaluating this when agreeing to loan a percentage of the property value. Higher premiums would be likely so agreements need to work for all parties.

Incorporating a rent suspension clause taking into account future pandemics could be more valuable. Rents are usually slow to respond given typical long-term leases, but as many things have seen fast acceleration over the past seven months, it’s not wild to imagine that rental agreements might too.

Author MarketFinance