With 2023 underway, it is timely to consider how commercial tenants can leverage market conditions to improve their tenancy arrangements. 

What is becoming increasingly clear is that the pandemic recovery is characterised by uncertainty, with a significant question mark pertaining to the RTW (return to work) landing point for office tenants, and with diverse opinions on the outlook for brick-and-mortar retailers. Indeed, multiple commentators are reporting that RTW for office tenants is slower than anticipated and that many tenants have already committed to strategies to reduce their CBD footprint. On the retail front, REITS tied to retail assets are being discounted in anticipation of downward pressure on asset values. 

With uncertainty comes increased risk for commercial tenants and opportunities for those who adapt quickly and well. With accommodation commitments being both an enabler and a considerable expense for a business, a significant challenge for commercial tenants will be to shift the commercial leasing norm in a way that makes the tenancy arrangement more supportive of tenant recovery, having regard to the need to rethink and reset in uncertain times. One can expect a growing call for landlords to take on more risk tied to the utilisation and performance of the leased asset. What is certain is that landlords will seek to preserve the long-standing commercial leasing norm, which substantially transfers the risks of ownership to the tenant without tenant participation in the growth in the value of the leased asset.

The pandemic evidenced the extent to which typical commercial leases favour landlords, with commercial tenants having little or no recourse for their diminished and/or interrupted use of their leased premises. Looking to 2023 and beyond, the pandemic has reinforced that tenants need landlord assurance about being able to utilise a leased asset as intended throughout the leased term, failing which there needs to be an appropriate set-off in tenant obligations. We encourage all office and retail tenants to review their accommodation needs into the future and reset their required leasing arrangements while regarding their business objectives, strategies, and risks. Negotiating more flexible lease arrangements with greater landlord risk sharing will be difficult and require a step-change in negotiating approach and method.

All the very best for 2023 and beyond!