Commercial leases in the UK are becoming shorter and more flexible as property owners are forced to make concessions to hard-hit tenants, underlining how the coronavirus crisis has upended the industry.
The average length of a lease for commercial tenants, which include retailers and companies taking office space, tumbled by 10 months between February and June to 27 months, according to property data group Re-Leased.
The reduction offers greater leeway for tenants, many of which have been hit by the economic fallout from the pandemic. But for property groups, shorter leases mean less certainty over the future income stream that they — and their investors — rely on.
Shorter leases “present a risk to landlords due to the uncertainty of future occupancy and cash flow”, said Caleb Dunn, a commercial analyst at Re-Leased.
The pandemic has turned a spotlight on the sometimes fraught relationship in the UK between commercial landlords and their tenants, in which the former have historically wielded more power.
Faced with government-imposed lockdowns in the spring and now a severe recession, tenants have withheld rent of roughly £1.5bn a quarter since March, according to Remit Consulting. Retailers have only paid about half of the rent since March, according to Remit.
As a result, a growing number of landlords are exploring the option of turnover leases, which link the level of rent to the sales that retail tenants generate from their stores. Capital & Counties, the owner of London’s Covent Garden market, and Hammerson are among the major retail landlords considering such arrangements.
But where tenants have not received concessions, some are now looking to gain greater leverage through launching an insolvency process known as a company voluntary arrangement (CVA).
The move is a way of restructuring leases to ensure a tenant’s survival, but landlords complain that some businesses are taking advantage of the process to make excessive cuts to their rent.
The British Property Federation, a trade body for property owners, intervened in the debate on Friday.
“We support a rescue culture and the original purpose of the CVA — to support a struggling business to create a sustainable recovery strategy,” said Melanie Leech, chief executive of the BPF. “Today, the CVA is being increasingly used as a weapon, a boardroom negotiating tactic for solvent businesses to rip up leases freely agreed with property owners.”