Pandemic takeaway #2 - ‘Current lease norms restrict tenant enterprise’
The pandemic highlighted how harmful lease arrangements can be for office, retail, and industrial tenants as lease commitments continued despite interrupted usage of the leased premises. In this article, a group of LPC advisors provide their insights into how and why longstanding lease norms restrict tenant enterprise and put a handbrake on economic recovery from the impacts of the pandemic. This and the follow-on articles will help any tenant negotiate more ‘tenant friendly’ lease arrangements.
Lease norms and the pandemic impacts on tenants
“We cannot solve our problems with the same thinking we used when we created them.” - Albert Einstein
The Cambridge dictionary defines a norm as ‘an accepted standard or a way of behaving or doing things that most people agree with’. In article 1 of this series, we explained how property investors and leasing agents exert far more influence on leasing norms than do tenants, who are fragmented with asymmetrical access to leasing information. The consequence is that long-standing and broadly accepted leasing norms favour landlords and disadvantage tenants, and it has taken a pandemic to focus tenant attention on this reality.
The pandemic impacts forced multiple tenants to recognise how unresponsive their lease arrangements are to changing circumstances, with lockdowns increasing tenant awareness of the need for leases to be more flexible, with more risk carried by the landlord, and with enhanced landlord obligations and guarantees that are more supportive of tenant enterprise.
On the other hand, institutional landlords have resisted such changes as the immediate impact of the pandemic on their businesses has been contained because of portfolios with a long WALE (weighted average lease expiry), together with lease arrangements that provide the landlord with strong tenant guarantees whilst protecting their passive income streams.
Taking a longer-term view, property investors with CBD office holdings are having to face the fact that office tenants are updating their accommodation strategy to recognise trends relating to businesses needing to be more flexible, employee lifestyle preferences, workplace technology, urban sprawl with increasing commuter times, climate change, carbon emissions, and WFH acceptance. Whilst landlords are placing an increasing emphasis on improving amenities to enhance the appeal of CBD assets to tenants and their employees, the pandemic has accelerated the trends referred to above, resulting in a growing tenant awareness of the need for fundamental change in commercial leasing norms, such that accommodation arrangements are more aligned to evolving business requirements and risks with greater tenant assurance relating to utility value throughout the term.
In relation to retail tenants, the pandemic has accelerated online retail and the pandemic has left many retailers with weaker balance sheets and deferred rent obligations. Labour shortages are adding to the recovery challenge. As with office tenants, the pandemic has increased retail tenant awareness of the need for leases to be more responsive to business challenges and changing circumstances, with arrangements that better align landlord and tenant interests. Retailers will continue to revise store formats in the move to omnichannel distribution, with increased emphasis on ‘click and collect’ shopping, and with growing pressure on landlords to facilitate evolving accommodation requirements.
Lease norms and economic recovery
“Actors only get off the stage when the stage is burning” - Anonymous
As we learn to live with the pandemic, we also face the challenge of recovery from the economic impacts of the pandemic. The challenge is not for the faint-hearted, and reputable commentators have pointed to the willingness of people and businesses to share the pain of recovery as a significant requirement for recovery.
A particular concern in this regard is the lag in the pandemic impact on property investors, in comparison to the more immediate impact on most tenants who have been required to fulfil their occupancy obligations whilst experiencing declining revenue. This time-lag has the potential to limit the much-needed change to leasing norms, as landlords are not experiencing the same level of urgency that tenants are experiencing to restructure leasing arrangements. This will restrict tenant enterprise, increase the incidence of business closure, and will put a handbrake on economic recovery.
As tenant enterprise is the engine room of the economy, our efforts are directed at contributing to fundamental change in leasing norms such that leasing arrangements promote tenant enterprise and facilitate recovery.
About LPC & the LPC Subscription Service
LPC provides office, retail, and industrial occupiers with advice and services that make a difference to their accommodation arrangements and respective businesses. With no ties to investor property owners or leasing agents we only represent occupiers, and our advice is free from any conflict of interest that would disadvantage an occupier. You will find the LPC subscription service most useful when it comes to identifying key terms for renegotiation and getting to the lease you deserve.
