The challenges of lockdown over the previous five months have been felt equally by both Landlords and Tenants; especially in relation to rental income. In the March quarter rental period, approximately 50% of rents were paid by Tenants and this dropped to 25% in the June quarter.
This is understandable, considering that many businesses have ceased trading and this has resulted in a drastic reduction in their cash flow. In these circumstances, negotiations between Landlords and Tenants are vital; for example, rent deferrals can be agreed by way of a side-letter or a Deed of Variation of the original lease, can be used to amend the terms. A Landlord may be prepared to forego a certain amount of rent in exchange for the Tenant giving up the flexibility provisions in their lease.
Going forward, we may see a combination of fixed and varied rent. The varied element could be linked to turnover, footfall or ‘catchment area’ i.e. combining online sales within a certain distance of the store (the argument being that online sales tend to be two or three times higher if a store is nearby).
There has been a trend for shorter lease terms in recent times, and this has been compounded during COVID-19. The pandemic has made us re-evaluate how we utilise our office space and, indeed, if major office spaces are needed going forward due to the success of home working.
Therefore, we should envisage smaller office spaces with shorter leases which will obviously benefit tenants going forward. One answer might be a more ‘turn-key’ or flexible space where Tenants can scale up and down depending on need. Landlords will need to provide managed space with internet access etc. so tenants can come into the office, plug in and start working.
These flexible arrangements obviously benefit the Tenant but recent surveys also indicate that younger staff are struggling with working from home due to the lack of collaboration, learning and mentoring from more senior colleagues so a balance will need to be struck between the well-being of employees, alongside the flexibility of work space. Therefore there may still be a place for the “traditional” office environment, albeit in a different form.