A look back on 2021 and where next for retail and office tenant occupiers
by Shoosmiths LLP
Trends in leasehold transactions during 2021 and expectations for 2022.
Now that the decorations are back in the loft, retailers are announcing their Christmas trading updates. There is a general consensus that the retail sector had a difficult time in 2021 as has been the trend in modern years and whilst some retailers will be announcing positive news to the markets, there are undoubtably some that are likely to continue to have a challenging time in 2022.
We continue to see a high number of instructions relating to retail space. While there were many reports in the media regarding the number of companies being liquidated and shops being boarded up, in 2021 the biggest trend for our retail tenant occupiers was either to renegotiate and vary existing lease terms with the removal or extension of break dates in return for a rent-free period, reduced rents or both on some occasions, with reversionary leases also being agreed at the same time; or deciding to simply re-gear in existing locations to a lower rent.
This shift highlights the conundrum that landlords are facing, i.e. is it better to have a tenanted property with a lower income stream, or gamble on finding another tenant for an empty unit that is willing to pay the existing rent and has equal or better covenant strength. The answer in the majority of cases seems to be the former, where a landlord may have to readjust its income expectations – an outcome, which is more palatable than zero income and an uncertain outlook.
In many instances, particularly in the fashion sector, tenants were more likely to have surrendered their previous open-market rent leases and then switch over to turnover-based rent models, which generally will be in place for the next three to five years. In 2021, we saw many pure turnover leases, which was something rarely seen before ‘lockdowns’.
Reassuringly, in a sign that retail is still very much an important part of the UK’s economy, there were not many locations in which our retail tenant clients sought to extricate themselves from entirely.
In the office sector, there has been a level of consolidation. I think this is likely to continue in 2022. Tenants have generally been surrendering perhaps one or two leases and moving into one new premises. Companies have been looking to ensure they have the right office space, in the right locations to support the business growth and the need for flexibility. In a sign that more businesses accept that there will be some level of home-working, some tenants are now looking for smaller offices than they might previously have let, but with improved facilities, better amenities, and higher energy efficiency.
In terms of other lease themes, pandemic drafting certainly continued to be a considerable issue during negotiations of leases between solicitors in 2021.
Given that the emergence of the Omicron variant has not, at the time of writing, sent England into another national lockdown, the commercial requirement for pandemic provisions may start to slow in 2022, although, as there are a number of warnings from scientists, pandemics are predicted to become more and more a part of our existence, and it would be sensible for tenants to continue to agree pandemic provisions in leases. If this is the case, we should see pandemic provisions becoming widely used and accepted as the commercial norm by landlords, and be in a standardised form.
Some of the key drafting points we addressed in retail leasehold transactions during 2021 were:
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Issue
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Generally agreed point
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How much should the rent be reduced by
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50% deduction in a sign that landlords are more accepting that the pain of pandemics needs to be borne equally.
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When would the reduction start and end
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During the period when a premises could not legally open to the public. If click and collect would be permitted then this would not bring an end to the rent reduction period.
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What if there is a rent free period during a lockdown period
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The lockdown rent reduction period would apply following the end of a rent-free period.
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Provisions for the rent reduction only to apply where a tenant did not have business interruption insurance or benefit from some form of relief from the government
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The tenant would not be required to obtain any business interruption insurance and such government support must relate to the payment of rent and, the support would need to be in relation to the same lockdown period.
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Suspension of tenant’s repairing liability
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Tenant’s obligation to repair during lockdown period is suspended provided the property is kept locked/safe and secure.
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Suspension of ability for landlord to forfeit the lease
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The tenant should rely on any legal moratorium on the landlord’s ability to forfeit the lease.
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In conclusion:
- Retailers are changing their modus operandi and delivering a different type of retail offering than they had done previously. Whether through click and collect, in-store offers, or demonstrations of products at invitational events, retail continues to adapt to survive.
- Employers are equally more accepting of workers continuing to desire at least some home-working and this is driving a change in their demand for higher quality office space.
The key message
The retail sector is very much alive, the right office premises will be needed and retail tenants should continue to push for pandemic provisions in their leases.