Taylor Walton


The end for traditional commercial leases?


As we head into the third quarter of 2021, there is growing evidence that market conditions are shortening the average commercial lease term, largely attributed to the impact of COVID-19. T is impact has been felt by commercial concerns


of almost every type and in a myriad of ways, from the virtual business standstill caused by repeated lockdowns to the seemingly permanent shift to fl exible working. T is has all combined to create a new dynamic in


the landlord/tenant relationship, with data gathered by BNP Paribas in 2018, showing that what impacts lease terms more acutely than anything else, is a sense of uncertainty. Looking at the average length of leases, terms were


coming down gradually until 2008 and the fi nancial crash, when they dropped by an entire year. Steady growth followed before another drop in 2016 caused by Brexit, and now it’s the pandemic. Credia, the Commercial Real Estate Index, tracks lease lengths on a monthly basis and it shows the


24 James


Khakpour-Smith Partner Taylor Walton


average length in the UK dropped from 48 months in January 2019 to hit a low of 27.4 months in June 2020, before climbing slightly to reach 30.6 months in April 2021. Traditionally, landlords held most of the power in this relationship,


particularly in the UK, where commercial space has often been scarce and in demand, but now the pandemic has disrupted the market and shifted the balance. While a short lease off ers a degree of fl exibility to tenants who can’t


be certain exactly how much space they’ll need in the future for their employees, they create uncertainty for landlords and investors in terms of expected cash fl ow. T e fl exibility demonstrated by landlords in switching to shorter leases and, in some cases, turnover leases (rent paid isn’t set in the lease but is based on the tenant’s turnover ), has largely been imposed upon them. According to Remit Consulting, tenants have withheld rent of


approximately £1.5bn per quarter since March 2020. Perhaps it explains why commercial landlords such as Hammerson have said they are willing to discuss more fl exible leasing arrangements, with Chief Executive, David Atkins, opining that the UK’s historic leasing model has served its time, is out-dated, infl exible and needs to change.


Commercial leases - time for change? Traditionally, the relationship between commercial tenants and landlords in the UK has been regulated by the Landlord and Tenant Act 1954, with successive governments reluctant to intervene in what were seen as strictly commercial arrangements. The pandemic has rendered this hands-off approach largely


irrelevant, with the government amending laws via the Coronavirus Act 2020 to greatly restrict the steps landlords could take to deal with tenants unable or unwilling to pay rent. T ese measures, together with interventions such as bounce-back


loans, the furlough scheme and business rate relief, have helped to hold back the tidal wave of insolvencies the pandemic could have caused.


ALL THINGS BUSINESS


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