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A key theme for commercial leases that seems set to continue is “Flexibility”, and the need for occupiers to have the flexibility to deal with their changing requirements has led to more diversity of options in the office space market (“flex”).
Occupiers are increasingly looking to move away from the traditional long term fully repairing and insuring (FRI) leases (typically 10 to 15 years) and are looking to negotiate more flexible leases to include:
- Shorter leases of five years or less.
- More favourable break rights and conditions.
- Less strict alienation provisions.
- Expansion or contraction options.
- Fixed rent deals or a move away from the traditional upwards-only open market rent review model (inappropriate for shorter leases) to increases in line with indices such as RPI.
- Fixed (inclusive) service charges (giving the occupier more certainty).
- Responsibility for fit-out and associated costs.
- Walk away rights at the end of the lease (the rationale for full dilapidations provisions is reduced with a shorter lease).
Landlords are increasingly willing to make concessions so that premises are more attractive to occupiers.
Short notice licenses
There has also been a move to more occupation under licence agreements, the biggest advantage being the ability to contract on very short notice (usually monthly) and almost always on standard terms and conditions (unlike a lease which tends to be a negotiated document, thereby saving on time and cost.
Serviced offices
Premises are also likely to be equipped and connected to services (allowing occupations to avoid protracted fit-out and delays and having to contract different providers, gain saving time and costs).
While there is likely to be an increase for the licensee in rent compared to a tenant (as the providers will pay for service costs and insurance) for many businesses, the aim is to have fewer contingent liabilities.
Importantly the onerous obligations to return the premises held under a lease in the same state as they were provided at the start of a lease do not apply.
Move to flex
To conclude, a whole raft of options are available in the market, including but not limited to serviced offices, co-working, and membership, as well as short-term licences, short-term leases or traditional FRI leases (each with pros and cons attached).
The demand for hybrid working continues to grow, and many companies are moving to flexible working. Flexible fit-for-purpose space has traditionally appealed to small to medium enterprises (SMEs) start-ups and companies in their infancy; however, large corporate companies now also want this type of space in their portfolios.
While customer demand drives occupancy, during these times of economic uncertainty, landlords and investors may be looking to diversify how they get income from their premises. For some landlords, this might mean changing their premises from single-let to multi-let, and for others, another option may be to turn empty floorspace into a successful flexible workspace.
Some commentators now believe there is a clear shift in power from owner to occupier. While it is nothing new that office tenants have always sought flexibility, in addition to these “traditional” demands, the focus for landlords to futureproof will include data connectivity requirements and Environment and Social Governance (ESG) considerations.