Commercial Property and Business Lease: Time to Reconsider the Bargain?

by Vengardesh Sivapatham LLB (Hons), LLM, Solicitor

01 January 2023

The commercial property market is rapidly changing. It is not the same as a decade ago.

The bargain between the landlord and tenant has to be revisited in view of the changing times and to ensure survival of businesses and high streets.

What has changed?

1. Change in interest rates

Before December 2021, interest rates have been at a historic low for more than a decade. Bank of England interest rates at the time of writing is 5.25%, which is considerable given that the interest rate before December 2021 was 0.25%.

This has an impact on business loan rates that the businesses regularly rely on and tenants ultimately have less money to spare for other costs such as rent.

Landlord's commercial property mortgages are also going up, which means that landlords are under pressure to increase rent to cover their increased mortgage payments.

2. Change in the financial outlook and inflation

Inflation hit 11.1% in October 2022 and whilst the inflation rate has come down, it has had a lasting impact on the economy. It is hard to imagine that inflation figures in March 2015 was 0%, and it is a good indication of how times have changed.

Consumers have less to spend and this has contributed to low incomes for businesses especially in the high street. Costs have also gone up from business rates and bills.

The above has meant a further squeeze for commercial business tenants.

3. Change in high street trends

There is also a changing trends of the types of businesses can survive on the high street. Example of trends are given below.

There is a clear move away from expensive office spaces and an increase in virtual offices.

Traditional high street non-consumable retail have predominantly moved to warehouses and online.

Fast delivery companies for hot food have meant that one does not need a high street shop to sell hot food.

The financial constraints means that more and more businesses are thinking twice before opting for a commercial business property lease to start their business.

4. Change of perspective: Landlord

Landlords have to develop an understanding of tenant problems naturally, namely the changing nature of the high street, increased costs and lower consumer demand as far as the high street is concerned.

The approach of holding a hard position without providing alternatives may not be the smartest option if you are landlord.

All options should be legally water tight and not leave the landlord liable to any unforeseen losses or future liabilities.

5. Change of perspective: Tenant

Tenant must also understand that the landlord has to pay a mortgage, which has gone up. At the same time the tenant also has to think about the changing nature of consumer habits, tightening of spending, increased costs and the current economic situation.

Tenants should be aware that they may lose potential benefits of the new circumstances if they blindly accept what is put forward by the landlord. Tenants must be sensitive to the new circumstances and the new emerging bargain, so that they can effectively make best use of the opportunities presented to them.

6. What is the way forward?

It is not doom and gloom! It is not certainly the end of the road, but the bells are ringing loud and clear. Change your approach.

Early advise and a bargaining strategy is essential. Both the landlord and the tenant must have an effective and legally watertight strategy when walking in for the initial negotiation to maximise their benefit.

An open mind has to be kept on emerging business models for the high street and the challenges, opportunities and risks that these new ventures can bring.

A tightly restricted fully repairing and insuring lease should not be the only option on the table, but other solutions that allow tenants to thrive in the business and the landlord to make a good return. Effective use of altering existing lease terms without compromising important terms in the lease and effective side letters are some of the basic tools for existing leases.

However, there needs to be a word of caution here. The right tools are needed to be used for the right job.

Since the solution here is to be bespoke, standard precedents and historically standard ways of approaching leases may result in landlord and tenants alike losing out.

We have specialists in commercial property leases, who offer tailor made leases, so that clients make optimal use of the opportunities presented to them. Get is touch with us on 020 88 666 333.

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