Sarah Manley, partner and commercial property specialist at Clarke Willmott LLP, looks at the future of property management in the months and years to come following the impact of several national lockdowns and ongoing uncertainty.
The pandemic and resulting changes to the way we work and occupy commercial space has significantly accelerated changes we were already seeing within the industry. Clients, particularly in the office sector are increasingly seeing property as more than just a space – now they want it to be a service, with lots of added value to facilitate the collaborative meetings of a workforce who will likely continue to work from home at least some of the time. Green credentials are also increasingly important, and despite the economic challenges at present, tenants remain willing to pay for properties that deliver on these aspects.
The future of property management is, in many sectors, finely balanced: a balance between enforcement of accrued debt and allowing a tenant breathing space post-lockdown; between short term lets and longer leases; between the ongoing value to tenants of physical shops as against or alongside an online presence or of office space and working from home.
The government hopes the furlough scheme will have saved ‘viable’ businesses and the difficult task for landlords is to identify those firms with whom to negotiate a future. The casualties of the lockdown in the retail sector have included household names with significant numbers of outlets and, in many cases, the smaller, more flexible high street shops have been able to survive, so there will be no hard and fast rules: no easy way to assess which businesses will return to profit.
The first thing landlords should do is to check the terms of the lease with each tenant. How much of the term is left? Are there break rights in the lease? Were any concessions agreed last year? Those tenants able to continue may be self-selecting and come to a landlord seeking an accommodation that will enable them to return to profitability. Those, for whom losses have already become overwhelming, may ‘throw in the towel’ and attempt to hand back keys without any formal agreement or surrender.
Whatever the particular circumstances, landlords will see changes across their portfolio. Some tenants will leave legitimately, exercising breaks or not renewing their tenancies. A decision will need to be made in respect of other tenants who have not paid rent and refuse to engage in dialogue. Some tenants may want to stay but seek a variation of their current lease terms.
How should landlords react? First, check the facts. Where possible view accounts filed at Companies House for a snapshot of the tenant’s financial situation and ask for accounts before agreeing to a change in the tenant’s liabilities. Check what guarantees are available under the current lease or from a previous tenant. Consider asking for a business plan to see how the tenant intends to find its way back to profit.
If a landlord is being asked to give concessions, consider a time limit either for the concession to end or for the landlord to break the lease if the tenant is still not trading well. Such a break could be for both parties. It cannot be assumed that there will be no new tenants in the market for the right sort of property. Possible concessions might include:
- a rent reduction;
- different rent payment terms;
- waiving a rent review;
- a surrender of part of the premises;
- a change in calculation of the rent e.g. from rack rent to turnover rent or a change to increases by indexation;
- a rent or service charge cap so the tenant can budget;
- a change to smaller premises in the landlord’s portfolio;
- a change to the permitted use to allow different uses on the premises; or
- permitting subletting of part or permitting occupation of part by a concessionaire.
Looking at this list, landlords need valuation and legal advice in reconsidering letting arrangements in the future. To appeal to a new generation of tenants, landlords will need to consider shorter leases on more flexible terms to avoid long vacancies waiting for the ‘perfect tenant’. A closer relationship where parties are acting together to maximise the attractiveness of a property to occupants and (in a retail setting) to shoppers will see a better return for both parties.
Landlords can also consider how to improve their portfolio. Limitations on movement during the lockdown has seen an increase in local shopping. A unit could be split into smaller parts to appeal to smaller businesses and advice could be taken on improving out of town assets which might, previously, have been considered secondary or tertiary sites.
The successive lockdowns of 2020 have tested the resilience of tenants and landlords and the immediate future will remain challenging. Taking back some properties seems inevitable, but this also provides an opportunity to make that property more attractive in the market. Advice from professionals will assist in making use of recent changes which have remained dormant during lockdown e.g. changes to the Use Classes Order and to permitted development rights which allow for creative use of space that can also bring a profit whether it be income or capital.
Some gaps in occupancy will also assist in the development of a portfolio better placed to respond with agility to other issues e.g. the government has made clear its commitment to reducing carbon emissions and increasing the minimum energy performance standard for commercial property: a vacancy could be used to upgrade the energy performance of property ensuring not only, that it is lawful to let the property, but improving its marketability.