Flexibility should be built into lease arrangements, Business Post, April 05 2020

Good communication between landlord and tenant can go a long way to helping come to an agreement during these difficult times

Flexibility should be built into lease arrangements
by Patricia Ward

Don’t miss the opportunity to improve your lease arrangements.

Events in leases are sometimes missed; we often come across the issue of tenant break options being forgotten or instigated too late and in non-compliance with the lease in place. Side letters too can become lost or forgotten and often throw a whole new light on the subject. There are many landlords who prefer to see important matters ascribed to side letters for many reasons.

Legal documents must have a strong framework in place, they must place the onus on one party or another, and there must be penalties for misbehaving. Somewhere amid this structure is the human relationship of landlord and tenant and the reality of the marketplace. Fairness can be applied so long as it is by both sides.

Sometimes the vagaries and constraints of the lease documentation and the formality of the structures – there to give security and predictability – do not lend themselves to the ebb and flow of real life. To the uncertainty of growth versus contraction, it can sometimes offer little solace to the occupier looking to control outgoings or simply even to predict them.

Our experience at TWM is that communication is key. All too often this communication is fraught with difficulty and entrenchment, particularly at times of rent review and lease renewal.

We advise clients to engage at the right time, leaving plenty of scope for the formality of lease events in the future if necessary. Talking to your occupier, understanding their business needs and how these are impacted by the lease structure are key to arriving at an outcome attractive to both sides.

Long-term leases, particularly a feature of the last five years in the office market, may not always provide the flexibility required to counteract and rebalance when unforeseen circumstances arise. However, it is not only in times of uncertainty that these measures should be in place; on the contrary they are equally as important during ‘normal’ marketplace conditions.

It is unrealistic to expect that landlords will have the ability or desire to react to every marketplace event, but there will be some, such as the current situation, which will be impossible to avoid.

Businesses often require certainty, this is not surprising, and that certainty can come at a price that might just compensate a landlord for looking at lease events in a more rounded way. The term ‘re-gearing’ simply means renegotiating the terms of your lease during the course of the lease. While no one sets out to do this, it can become necessary or even attractive to do so.

TWM has experience of re-gearing leases where the passing rent was high and out of kilter with the market. With upwards-only rent reviews, some landlords might not see the need to change this, but it is important for the value of your asset to be as shockproof as possible. Even with a good or excellent covenant, an over-rented building will be assessed as risky. There is an opportunity to offer the tenant what they need, and this is something we have experience doing.

We negotiated a term from four years to 15 years in return for a rack rented lease with CPI reviews. Again, certainty was key for the tenant‘s cashflow, but also for future investors. In this instance the re-gear led to a very successful sale for our client.

In a rising market, landlords may be keen to implement rent reviews. However, it can sometimes be more advantageous to look at other options – even securing vacant possession, if the tenant is willing, and gaining the ability to capture the demand and set new levels within a multi-let asset. Again, we have advised clients to be brave in these scenarios, where we were confident the demand was there, and it paid off with new lettings far exceeding previous rents.

Equally, allowing a great covenant to remain and downsize rather than vacate may also be worth considering. Tenants are often willing to look at a longer lease term in return for a softer rent profile in the shorter term.

Flexibility for the landlord can be built into all these arrangements, and as deeds of renunciation for office leases are now becoming commonplace, this is the perfect tool.

Where debt is in place, regard has to be had to all lease discussions to ensure debt covenants are met. This can mean that allowing vacant possession outside of lease dates is not always possible. However, again communication with the bank is important and a full explanation of the strategy can sometimes yield the right result.

The decision on what options are open for discussion comes back to communication and putting a face to a name. Many landlords never meet or know their occupiers. The landlords who behave differently are often the ones who benefit, and if you are putting this important relationship in the hands of your property advisor, you need to ensure their customer service philosophies are aligned with yours.

We recently worked closely with US company Afilias Technologies Limited to assist them in moving into one of our client’s buildings. Afilias highlighted that achieving a very tight timeline was key to the positive experience they had. They also noted that a quick response to queries, professionalism and ability to deliver on promises made the process as stress free as possible. Everyone must set out at the outset to achieve this type of interaction and to make it a priority.

Tenants equally need advice and to be reassured that they are dealing with the right landlord – this is after all a long-term relationship. There is more to finding a new office than choosing furniture and a new address. The opportunity for both landlords and tenants is often in the detail of the occupational documents but just as much in the quality of the communication.

Patricia Ward is a director at commercial property advisors, TWM