Pandemic restrictions have meant that the number of new commercial lettings taking place has decreased, and many transactions have been put on hold. The retail and hospitality sectors have been particularly affected and rent deferments and rent-free periods have been granted by landlords to help out tenants. Since the market determines negotiations around lease renewal or rent reviews, the lack of deals taking place subsequently means there’s a lack of data to base rent prices on. Moving forward, should landlords base new rent on pre-lockdown deals, which may not reflect reality, or try and predict the ‘new normal’ ?
Factors Affecting Lease Renewals & Rent Reviews
During the unprecedented lockdown, rent deferments and free periods were commonly granted by landlords on a short-term basis. But as we’re now in a period of social distancing, there are a number of factors that are coming to light that can make basic or headline rent more difficult to ascertain for an upcoming lease renewal or rent review.
For example, what will hospitality look like in a year’s time? Will restaurants be back to normal or will social distancing measures still be in place? What level of custom can restaurateurs expect?
It is also hard to know what retail and commercial sectors will look like in a year’s time (but we have written down our predictions on our blog). Will online shopping accelerate the decline of secondary retailing? Will increased homeworking affect the demand for commercial leases?
Rent Review Provisions Offer Certainty
One solution for lease renewal is to include the provision for a rent review after 12 months, at which time the situation may be clearer. This gives the landlord and the tenant some certainty going forward that the lease will continue but not lock either into an unrealistic rent.
One thing is clear when negotiating lease renewal or rent reviews, any arrangement needs to protect both parties’ interests. This is key for smoothing the way in uncertain times, and assisting landlords and tenants to work together.