The increase in flexible office working and its impact on commercial leases
Flexible workspaces have become more popular in recent years, with The Instant Group reporting an 11% increase in demand in 2015 – 2016. The shift from traditional office spaces to flexible workspaces represents both challenges and opportunities for landlords, who will have to respond to changing tenant requirements to protect their investments.
This article looks at what terms should be considered by landlords when they are looking to increase the flexibility of their leases and make them more attractive to potential tenants.
Shorter terms or more frequent break rights
In 2000, the average lease length was 16 years; now leases average five to eight years in length. We regularly see commercial leases for terms of less than five years. A shorter term allows a tenant flexibility to react to changes in its business.
However, an alternative option is to negotiate a longer term with more frequent break rights. Whilst providing the comfort of a longer term to a landlord, it gives the tenant the option to end the lease early if their circumstances change.
Tenants should be mindful that break rights are usually interpreted strictly, so it is important for the tenant to oppose conditions that could prevent them exercising the break. Although landlords will rarely agree to unconditional breaks, a compromise position is imposing reasonable and realistic conditions on the tenant's right to terminate. The Lease Code suggested conditions (principal rent paid up-to-date and property handed back free from occupation and continuing subleases) are now becoming the default position.
Upward only rent reviews are commonplace and rent reviews are usually based on the open market rent. While these are quite often accepted by tenants, a more attractive position may be to negotiate RPI linked rent reviews or refrain from rent reviews in shorter leases.
Increased alienation provisions
Offering wider rights to assign, underlet and share occupation may be appealing to a tenant, particularly if they are looking to be involved with co-working.
Reasonable conditions can be attached to alienation provisions that balance the tenant's ability to exercise its rights with the landlord's need to protect its investment. From a landlord's perspective, it will want to ensure that the new tenant will be as financially robust as its current tenant and is able to fulfil all the tenant obligations in the lease.
Options to expand
A tenant with a growing business may wish to have expansion options included in its lease. Such provisions may grant a tenant the option of occupying additional space within the building once that space becomes available. For example, a right of first refusal would oblige the landlord to first offer any additional space to the tenant before a third-party.
The real estate team have extensive experience with drafting bespoke leases. For more information, please contact Stephen Newson.