If you picked any two investors, developers or agents in London and asked them whether they thought demand for commercial space would increase or decrease, you could get two different answers. As lawyers, we can’t hypothesise about what may or may not happen but we can advise on the associated legal options available for tenants before entering into a lease.
Increase in Demand An increase in demand will inevitably lead to rents rising, meaning higher costs for a tenant. One way of mitigating some of this cost is to ask for break clauses. Break clauses allow one or both of the parties to end the lease at either a specified time or at any time. In this context, a ‘tenant only’ break clause would be the most valuable. A tenant can enter into a lease safe in the knowledge that if things are not working out, they can break the lease after a certain period of time rather than perhaps having to go through the process of transferring the lease to another (“assigning”). The landlord may resist this, as it means they will lose the security of being able to rely on rent for the full term. However it does have the advantage of making the lease more attractive to a prospective tenant in the event the existing tenant does look to assign the lease.
In addition, we have seen some landlords insisting on a lump sum payment to be made by the tenant in order to reserve the property and take it off the market. Any tenant who is asked for this should tread carefully. Without a formal agreement setting out the terms of such payment and how it will be returned should the letting fall through, the tenant will be exposed to the risk of a dispute. The payment may not be guaranteeing them any benefit, and may be non-refundable, leading to a tricky situation if discussions fall through.
Fall in Demand A fall in demand may spell the end of higher rental income for landlords, and means that they are likely to be more amenable to offering incentives to tenants. One of the most widely used of these is a rent-free period, which grants the tenant a period of time at the start of the tenancy during which no rent is payable. This is a useful mechanism for landlords, as it allows them to make the lease appealing to a tenant whilst not reducing the headline rent. This period of time given rent free is usually between three to six months, but can be longer or shorter. A tenant requiring any ‘fit-out works’ should certainly be looking to negotiate for a rent-free period in this situation.
Another consideration could be the provision for rent reviews. In a time of decreasing demand, a tenant will want to avoid a rent review clause that is ‘upwards only’, and will prohibit decreases in rent. In such circumstances the rent may then not marry up with the market at the time. A fall in demand should mean that Landlords are more amenable to negotiating tenant-friendly rent review clauses, as they will be more anxious to find a tenant so that they are not paying for empty space.
Another point that a tenant can negotiate for is flexible alienation and assignment provisions. These will allow the tenant to assign, underlet or sub-let their interest more freely. This has the potential to be beneficial for both landlord and tenant. It allows the landlord more certainty that the property is to be let whilst giving the tenant the flexibility to not feel like they are committing with very limited means of escape should more suitable options arise.
The above points are not a conclusive list of what should be considered, however they are certainly issues worth considering when negotiating your heads of terms. Particularly as the landlord’s agents will be primarily acting in the interests of the landlord. This will assist in striking a fair agreement at the outset and so avoid the need to revisit the heads of terms once negotiations are concluded and solicitors instructed. This, in turn, will save time which will be an advantage to all of the parties involved.