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The second lockdown's effect on commercial property

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The second lockdowns effect on commercial property

Last week, I wrote a blog about the impact of the pandemic on the commercial property market so far, as we embarked on the second lockdown.  This week, I will take a more practical look at what we might expect to see in our day-to-day working lives as we struggle to keep the commercial property sector afloat in the future.

As lawyers, carrying out the transactions for our clients from all industries, we have seen changes in drafting and negotiating practices this summer. In terms of blue-sky thinking, we have already seen licences for pop-up shops, restructured rent payment plans and targeted portfolio reviews to increase technology, sustainability and building safety standards in order to provide a new kind of offering when the sector emerges from the darkness.

On 1 September, we saw changes to the planning system with an overhaul of the Use Classes Order which will allow greater flexibility for some commercial premises to move between certain uses without planning permission. This should go some way to supporting the recovery of our high streets as buildings are able to adapt to market forces.

The new Government Code of Practice which is a result of wide consultation with industry leaders to encourage landlords and tenants to support each other during this crisis is worth a read.  It is temporary and voluntary at the moment but may evolve to become mandatory if it proves to be relevant and offers genuine assistance to the sector.

We will definitely see changes to the business tenancies that underpin the investment market too.  Frustration and Force Majeure do not normally form part of the business lease narrative.  Remember the Brexit frustration case at Canary Wharf?  However, it is becoming increasingly likely that tenants will force this issue onto the table, or start to demand shorter leases, more flexible break options and user clauses.

Also, it’s pretty obvious that the “uninsured risks” definition will be expanded to cover wider social and economic situations.  It was done before when terrorism and flooding became very real risks across the board.  It is currently only used to cover physical damage to a property, and the FCA has already won a test case at the High Court (set to go to appeal to the Supreme Court) that settled the issue of non-damage business interruption losses caused by the pandemic.

Turnover rents may also become more popular, driven primarily by the difficulties faced by retailers.  Landlords hate them as a rule, as they are unpredictable but turnover rents give tenants greater protection and help if things go very wrong for reasons outside their control.  To a landlord, they may therefore be better than a CVA, a tenant administration or, heaven forbid, an empty unit!

Finally, our good old friend the FRI lease may be eroded even further.  Beloved of the commercial property investor, it traditionally passed the burden and cost of running premises onto the tenant.  It used to be 25 years long and offer privity of contract.  But once again, the landlord may need to make concessions here.  We may see capping, fixing or sharing of repair liabilities, especially in larger or older buildings which could impact on the value of an asset. On a wider scale, this could have a real impact on the UK commercial property market, if the FRI goes completely. 

In short, huge change has happened this year and is still happening - across the market generally and in our everyday lives.  The sector, including the investors, the occupiers and their professional advisors, has responded surprisingly well.  The key is to remain responsive, agile, open-minded and collaborative.  Most of us may well be locked down at home on our own again, but we still live and work in the global village and we must continue to work together using the new tools and practices at hand in order to emerge much stronger from this crisis and to help save the commercial property market.

If you require advice on any commercial property matters, our teams are here to support you via phone, email or video conferencing.

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