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How the challenges of the COVID-19 pandemic have changed occupiers' expectations and requirements

15 July 2021

We recently held a roundtable discussion with our key occupier clients and contacts, across the retail, leisure and office sectors. The discussion centred on the challenges and experiences over the last eighteen months and how this has changed occupiers' expectations and requirements. Read more to find out the key points.

It has been a year of negotiations and our National Occupier Team has been in considerable demand. Many occupiers have been refining their pandemic clauses and requirements for their leasehold estates and there are now a number of standard requirements commonly specified in Heads of Terms. 

We recently had the opportunity to bring together some of our key occupier clients and contacts, across the retail, leisure and office sectors, for a roundtable discussion organised by our National Occupier Team, and chaired by Rachel Lawler and Julie Galbraith. 

The discussion centred on the challenges and experiences over the last eighteen months and how this has changed occupiers' expectations and requirements.

There were a range of experiences as to how occupiers have had to react during the pandemic. Generally, however, all participants had faced challenges and either through necessity, or as a result of the opportunities available in the market, had taken steps to review their overall property requirements. A rationalisation and re-gear of property portfolios has been an essential component for many occupiers seeking to weather the Covid storm. 

It has been a year of negotiations and our National Occupier Team has been in considerable demand. Many occupiers have been refining their pandemic clauses and requirements for their leasehold estates and there are now a number of standard requirements commonly specified in Heads of Terms.

The introduction of a "Covid Rent Suspension Clause" to provide for situations of government enforced closure is now a standard ask, as acknowledged by the court in WH Smith Retail Holdings Limited v Commerz Real Investmentgesellshaft mbH. In that matter Judge Richard Parkes QC considered the trigger for a pandemic rent suspension clause in a renewal lease under the Landlord and Tenant Act 1954. There was, however, an acceptance that there would be a pandemic rent suspension clause and one of the matters in dispute was the trigger for such a suspension, demonstrating how such provisions have quickly become mainstream. However, it will be interesting to observe how the case law develops in this area.

There were a range of acceptable positions within the occupier group, largely dependent on the whether the occupier was classed as "essential".  However, even essential retail and services have suffered from a reduction in footfall, and in many cases there was a recognition that sharing of the burden between the occupier and the property owner is an equitable outcome. Essential retailers need to be particularly mindful of the trigger for rent suspension and should be careful to negotiate that any rent reduction is triggered by the closure of non-essential retail, if for example, they are located in a Centre or trade alongside non-essential retail and are dependent on their footfall. 

Occupiers are also scrutinising their other property outgoings to consider where cost savings can be made across portfolios including analysing service charges, insurance rents and considering payment terms. To help manage cash flow, many occupiers now insist on monthly rental payments, as opposed to the usual quarterly terms. However, in some cases the additional administration costs of collecting on a monthly bases and also dealing with payment terms of the landlord's suppliers have made this more problematic. Occupiers are also seeking to cap service charge payments or request rents inclusive of service charge and insurance. 

Concessions achieved are generally reflective of the bargaining position of the parties and for larger brands there are often reputational factors at play. However even larger multi-national occupiers have been challenged by the pandemic and any savings achieved in light of large operational costs are always welcomed.

Some occupiers have sought to introduce turnover rents as their preference for dealing with potentially volatile trading conditions, however, for many occupiers a turnover rent is not the panacea, particularly for strong performing stores when rent can end up being a disproportionate expense, penalising success. It was generally accepted by all occupiers that the practicalities of leases with a base and turnover rent can be difficult, as they involve significantly more administrative work. It can also be difficult to adequately negotiate the position for those retailers with a large online presence and the challenges that poses for determining turnover from the relevant premises.

Lease terms are generally getting shorter, and there is now a tendency to seek a five year lease with a break after year three to ensure flexibility. Flexibility is key for a lot of occupiers so they can adapt to changing circumstances or commercial trends. Many occupiers seek to negotiate index-linked rent reviews, which included a cap and collar, but the trend for shorter lease terms also avoids the need for protracted negotiations as to the terms of any rent review clause.

The majority of occupiers have availed of the support provided by Government, by utilising the furlough scheme, availing of rates reductions or holidays or receiving other financial assistance.  The protection afforded by the current moratorium on evictions due to non-payment of rent has been a welcome measure to allow occupiers to seek consensual arrangements with their landlords and the extension of such measures will be a relief to many occupiers.  

On 16 June, the chief secretary to the Treasury announced that the current moratorium would be extended for a further nine months: from June 2021 to March 2022 (In Northern Ireland the current measures are extended until 30th September 2021). In addition to this, the UK Government's proposal includes that the debts accumulated during the crisis will initially be ring-fenced in order to protect those tenants made most vulnerable due to trading conditions. The Government intends to introduce legislation in the current parliamentary session establishing a binding arbitration process for cases where agreement cannot be reached. 

In many cases temporary solutions and concessions negotiated during the pandemic have come to an end and until Government restrictions are lifted (and for some time after) occupiers will continue to face challenges. However, in many cases landlords and tenants and their advisors have sought to reach commercially equitable solutions with many landlords being able to take a longer term view to ensure the future viability of their tenant.

 

For more information on the issues discussed, please contact one of our experts.

Further Reading

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