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Luke Johnson wrote a poignant article early in May for The Sunday Times – Time to end the abuse of tenants – kick starting a discussion about a sorely needed new relationship between landlords and tenants.

Covid-19 has been bad news for just about everybody in one way or another. Commercial property – a subject clearly close to our hearts – has a very specific problem, however.

As Johnson points out, commercial property investment has had a long and wonderful purple patch. Many have benefitted, not least of all pension funds in which most of us have a real interest (sooner or later)!

However, a massive change is clearly upon us. Indigestible as it may be, enlightened landlords will tackle it first and reap the (maybe more limited) rewards. On the other hand, those who are slow to react will struggle to get their space occupied. The pandemic makes it likely that previously income-producing properties suddenly become a financial burden.

Enlightened office landlords will adapt to the new normal and reap the rewards. Those who are slow to react will struggle. Previously income-producing properties will suddenly become a financial burden.

Looking for answers in the serviced office sector

The answer is fairly clear – for office space anyway. Not that long ago, London’s serviced offices used to be a very small – and largely disregarded  – part of the market. And yet over the last decade or so, the serviced office sector has grown massively. Why?

Many tenants – especially the new generation of businesses – no longer want the hassle, costs, responsibilities or the lengthy commitment of a conventionally leased office.

If a tenant opts for conventional leased office space, they also take on the following unwelcome disadvantages and burdens:

  1. They have to wait an age to move into their offices whilst the lease is agreed. Too slow!
  2. They have to pay exorbitant legal costs. Costly, not to mention hard work understanding the subject!
  3. They have to fit the space out. Who wants to learn how to carry out this work – including getting approval from the landlord and other necessary authorities – then pay for something that may be obsolete in a couple of years?
  4. They may have to give the landlord a substantial rent deposit – removing potentially vital cash from the business.
  5. They have to take office space for a term much longer than they may really want. If they need to move on, it’s their (massive) responsibility to find a replacement tenant!

Many tenants – especially the new generation of businesses – no longer want the hassle, costs, responsibilities or the lengthy commitment of a conventionally leased office.

Re-balancing the relationship between landlord and tenant

Until now it seems the landlord has the whip hand, whilst the subservient tenant bears all the burden. That balance of that relationship will now need to fundamentally alter. All of the above factors had already become big negatives even before the coronavirus lockdown. Crises are often catalysts for existing trends, discussed at length in our article on the post-lockdown future of London office space. In the “new normal” I predict these existing burdens will now become overwhelmingly off-putting for the modern office tenant. Even the laggards have now learnt how to use Zoom!

It’s highly likely we will now see reduced demand for London office space and increased reluctance on the part of tenants to take on the above responsibilities. It’s also possible that some office tenants will require more space than before to comply with social distancing. But of course, they won’t want to pay any extra!

Landlords should forget about long term leases on the old basis and get used to providing the finished article to tenants on a relatively short- term contract. Take the plunge and provide a high grade, modern service.

It’s essential that landlords engage with this radically changed landscape, lower their expectations and modify their approach. They should forget about long term leases on the old basis and get used to providing the finished article on a relatively short- term contract. The serviced office sector has already established that tenants are prepared to pay more rent in return for flexibility, reduced hassle and responsibilities. It’s now down to landlords to take the plunge and provide a high grade, modern service. Failure to act means that serviced offices will be the winners.

Landlord v Tenant: daring to rebalance the relationship

About Michael Fraser

Michael Fraser

Michael - founding partner of Find a London Office - started in the London property market in 1970. Michael has developed extensive knowledge of the locations, the owners, the rental values, and - most importantly - has developed very solid contacts with the other agents working in the hub of the conventional office market, giving him a considerable advantage both sourcing office space, and negotiating the best possible terms for the tenant.

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