According to the Royal Institution of Chartered Surveyors it may well be 2025 before real estate in the UK shows signs of sustained recovery. It is understood that the demand for industrial and residential properties will be strong, the picture is much bleaker for retail and office space. Both are facing challenges from the lack of demand and changes in consumption and working patterns.

Those purchasing real estate are warned about the ‘buyer of goods’. As more and more of us buy online, the sector is being hit by wave after wave of company voluntary arrangements (CVAs) and insolvencies; even where tenants are trading well many are not paying rents.

With businesses shifting from working in an office to remote working at the outset of the pandemic and moving to a hybrid structure, many are now reviewing whether they need all of their existing office space, and some are seeking to reduce their overhead. As more office space becomes available this will in turn drive down rental income. In addition to this, there is a prospective increase in office space caused by retail units and in particular large stores, of which the John Lewis and Marks & Spencers’ stores in Oxford Street are the most visible, converting part of their space to offices.

Tenants are likely to demand increasing rent-free periods, perhaps as much as 20% of the length of the term.

Issues for landlords

The current coronavirus moratorium on landlord/creditor enforcement is currently extended to 30 June 2021. However, it is likely to be extended further until the end of the third quarter of 2021 because of pressure led by retail tenants. But there is no moratorium on demanding rent.

CVAs are particularly landlord unfriendly and those advising landlords need to look carefully and swiftly at the terms of CVAs, particularly notice periods. Close scrutiny of any new CVA is advised.

Those advising landlords need to be astute to some of the untenable defences raised by tenants who wish to avoid paying their rent. A favourite claim by tenants is that there is some kind of implied term in the lease that means no rent is due if the store is unable to open because of the pandemic. In fact, as explained by the Supreme Court in Marks & Spencer plc v BNP Paribas [2015] UKSC 722 the scope for implied terms is very limited, particularly so in the question of leases, and the author has experience of obtaining summary judgment against defendant tenants when this issue is raised.

Guarantors are likely to try and wriggle out of liability. It is particularly important that if the terms of the lease are varied or indulgence is granted to the tenant, that this is done with the consent of the guarantor otherwise they may be able to avoid liability.

Agreements for lease which are subject to conditions may also come under scrutiny as tenants seek to back out of bargains made before the pandemic. Landlords need to make sure that the relevant conditions such as completion of landlord’s works are bomb proof. The author has experience of a landlord losing a good covenant of a refurbished building because works to remedy dampness were not completed by the long stop date.

Issues for tenants

The operation of and compliance with break clauses will continue to be a major issue for tenants. It is imperative that those advising tenants ensure that break notices are served in time and on the correct person. The ‘vacant possession’ condition has come under scrutiny again following the decision in Capitol Park Leeds v Global Radio Services [2020] EWHC 2750 (Ch)3.

Some commentators consider that the reluctance of the law to apply the principles of repudiatory breach in the context of leases may come under review. For example, tenants of a unit in a large shopping centre which has lost its anchor tenant, and thus suffered a significant decline in footfall, may be able to argue that a fundamental term of the parties’ bargain has been breached and they are entitled to accept the breach and terminate the lease.

So long as the market for office and retail space remains depressed tenants may wish to operate and ‘lock in’ rent review clauses, particularly if the lease is not a conventional upwards only review.

The next 18 months are going to prove as interesting for real estate lawyers and litigators as it is for our clients. It remains all important to be alive to the issues this very fragile market is producing so as to avoid potential claims.