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So far this year the Business Space Lease Advisory (BSLA) team has observed increasing demand for lease regears, usually involving extending existing leases or removing breaks. More than a hundred new instructions have been received from one single occupier for properties in its portfolio. We anticipate that demand for regears from both landlords and tenants will continue throughout the second half of the year as businesses adjust to the post-pandemic commercial landscape.
It is now clear that productivity has not been impacted in the way that some had feared over a year ago, after workers were told to ‘Stay Home, Stay Safe’, and employees were suddenly forced to work remotely. Furthermore, it has become apparent that many employees do not wish to return to full-time office working. This has raised questions for businesses about how they use their workspace. Should they permanently shift to flexible working? Would hotdesking be more appropriate? Is it worth investing in new video conferencing equipment? Should a complete redesign and re-fit be undertaken?
Meanwhile, companies have to continue their day-to-day business, and as a result many are seeking to regear their leases. For some it is a way of creating breathing space within which they can reassess their business plans, while for others it is a way of taking advantage of opportunities available in return for making a longer-term commitment.
For landlords, the continuing certainty offered by a lease regear makes offering incentives (such as rent-free periods) worthwhile.
The three most-popular regear options since the start of the pandemic have been:
Selling breaks: Selling the break clause is an attractive option for both landlords and for occupiers who do not need to retain flexibility. In return for some level of rent free, the removal of a break can improve a landlord’s investment value.
Term certain extension: The pandemic has led to a trend towards shorter lease terms. Before 2020 a 10-year lease with a break at year five was commonplace, but office occupiers are now increasingly seeking greater flexibility. This creates opportunities for tenants who are able to commit to longer-term leases, as generally landlords are keen to extend the security of their tenants’ tenure. In circumstances where landlords are happy to give away incentives to tenants who wish to stay for longer terms, it can be win-win for both parties.
Reversionary leases: This is essentially early agreement on a new lease that comes into effect in the future, and is an effective solution for occupiers who intend to stay in their premises beyond the expiry of their present lease. This is attractive to landlords in a similar way to long leases, and they have been accommodating the early agreement of new leases in return for incentives which can be enjoyed immediately. This is a great way to give occupiers a short-term cash flow boost, whilst improving the landlord’s investment value.
Whilst some sectors have been hit harder than others during the past 15 months, there are options available to both landlords and tenants, across all property sectors. Further still, many of these put both parties in a winning position. In a post-pandemic world, most would agree this is both a rare and welcome opportunity.