The ‘new normal’ is one of the latest terms in the Covid-19 phrasebook that we are all using as we start to consider life after lockdown. What could the new normal look like in the world of commercial real estate, and, in particular, in the office sector? Whilst the country waits for further government guidance on the relaxation of the current restrictions, we discuss five practical and five commercial points that landlords and tenants in the office sector should be thinking about in preparation for the return to ‘normal’.
Five practical points
1. Management of people traffic within common parts Many landlords and tenants are already preparing for social distancing in the workplace. It will be important for landlords to be able to work collaboratively with their tenants to manage issues such as lobby and lift spacing, reviewing fire evacuation procedures, and limiting ‘touch points’. Landlords will not want to appear obstructive, and the smooth flow of people in and out of buildings will be key. Landlords may also need to bear in mind that there is likely to be an increased demand for commuter facilities such as bike racks, communal showers and changing rooms.
2. Management of people traffic within the workplace Tenants will need to manage their own clients, customers and employees and should consider staggering employees’ start, finish and break times and communicating this with their landlords. Tenants may need to consider separating desk space and limiting numbers in each office to ensure social distancing can be maintained. The use of screens and cellular partitioning to create a physical barrier could be a temporary solution. The management of communal facilities and break areas will also need to be carefully considered, with the use of and access to such areas either being limited or restricted altogether.
3. Staggered returns to the building Landlords of multi-let premises will need to closely consult with their tenants to establish return times. Who is able to return may be governed by central guidance but who is willing to return could be a different matter. Landlords may want to engage with their tenants at an early stage to establish who is looking to return to offices once restrictions are eased to help manage the process.
4. Re-engaging building systems Buildings may have had some of their systems such as air conditioning either switched off or working at a minimal level since the formal lockdown began in March. As we return to working from offices, ensuring that buildings have adequate and up to date systems and equipment, and potentially adjusted to increase external air flow, may well be on the ‘to-do’ list for building managers. Inspection, cleaning and servicing of such equipment is likely to be required before they can be restarted.
5. Health and safety While we await any additional health and safety legislation around the management and occupation of commercial buildings in light of Coronavirus, landlords and tenants will need to ensure that their duty of care to their occupiers, visitors and staff is fulfilled. Additional safety measures for landlords to consider might include installing flexiglass barriers where appropriate, placing adequate signage around the building about social distancing, implementing one way systems, having sufficient supplies of hand sanitiser and washing facilities in the common areas, implementing temperature testing, the closure of canteens, more regular deep cleaning of the building and providing guidance on waste disposal and the handling of post, packages and deliveries. Tenants will also need to consider additional hygiene facilities within their demise and producing policies and guidance to their staff and visitors for any new behaviours that will be required within the premises.
Five commercial points
1. Service charges The above practical considerations raise questions as to the payment of service charges under a lease. If building systems struggle to re-start following a long period of inactivity, who will bear the costs of any remediation works – should this fall within the service charge? The starting point here is to consult the lease, but many tenants may well argue that they did not ask that the systems be switched off; so should landlords bear the cost entirely?
The recovery of any additional costs of the landlord such as cleaning, preparing policies and procedures and preparing the building for social distancing will likely be sought via the service charge, albeit they will not have been anticipated by any landlords in the preparation of their annual budgets pre-Coronavirus. Whether or not this can be challenged by a tenant will come down to the interpretation of the lease and, often, whether the measures are ‘reasonable’ in the circumstances or in the interests of good estate management. Landlords in a multi-let property will also need to consider how the service charge will be calculated if some tenants return to the premises whilst others are prevented from returning or choose not to.
Landlords and tenants should be aware of the RICS professional statement for service charges in commercial property. Effective from 1 April 2019, the statement sets a marker for the standards of management in commercial property and provides mandatory obligations that RICS members and regulated firms engaged in this area must comply with.
2. Terms of the lease Tenants agreeing new leases will likely be looking for shorter leases with more flexibility. With a potential increase in agile working, tenants may also be re-considering their existing space and whether relocation to a smaller space is on the cards. Landlords and tenants should be reviewing term end and break dates in their leases and opening early discussions with each other, particularly if a lease is due to be renewed or a break date is nearing. This could be a ripe opportunity for a landlord to redevelop and avoid statutory compensation if a tenant does not want to renew.
3. Future ‘Covid’ clauses Landlords might receive requests from tenants taking new leases to include a so-called ‘Covid’ clause in their lease. As with current rent abatements for insured risks, such a clause could state that the rent will not be payable, either in full or in part, in the event of a future lockdown. Landlords will, of course, want to avoid this at all costs and with the involvement of lenders and insurers in many transactions, it may not be an option at all. Global pandemics have not traditionally been covered within ‘Insured Risks’ under a typical landlord’s building insurance policy, and, following the current crisis, we suspect that will remain the case meaning that the risk would fall squarely on the landlord’s shoulders. Landlords will be weighing the risk of having empty premises against an opening of the floodgates, particularly where they have a portfolio of tenants, and will need to make a commercial decision as to whether they are prepared to agree to such a provision, should the issue arise.
4. Fit out and development Landlords and tenants who have agreed to carry out either redevelopment work or fit out works respectively may have seen those works halted during the lockdown. Nonetheless, parties have likely agreed strict time frames in an agreement for lease or licence for alterations for such works to be completed. Tenants of new leases are also likely to be running down their rent-free period whilst not being able to carry out their works. Parties should therefore be looking to negotiate an extension of time for any works and tenants could be seeking an increase in their rent-free periods.
5. Discounted rents During the lockdown period, many landlords and tenants will have agreed rent concessions or holidays. As tenants return to the premises, they may be facing a return to full rental payments together with a call for the balance of the rent they have not been paying. Landlords and tenants should proactively engage with each other to come up with appropriate payment plans that, where possible, will suit the cash flow requirements of each party. Once the current moratorium on forfeiture ends, and subject to any further legislation that is brought into force, tenants may need to carefully consider the potential risks of forfeiture and other landlord remedies which they could be exposed to if further agreements are not reached with their landlord.
At present, it seems that questions are being posed at a faster rate than answers are being given but the more questions that you ask yourself as a landlord or tenant, the more likely you are to be prepared for what is to come. The upshot is that landlords and tenants will need to work collaboratively and creatively to address many of the issues that they will be faced with both in the short term, as we have discussed above, and in the longer term as we start to see a new social and economic ‘normal’ in our office environments.
If you have any questions about these issues in relation to your own organisation, please contact a member of the team or speak with your usual Fox Williams contact.