By Chris Barkley, senior associate, Goodman Derrick LLP.

During the recent pandemic, workforces have had no option but to become fully operational outside of an office environment.

While there are some obvious benefits to meeting with co-workers regularly, inevitably the high costs of city rents on long term office spaces has been brought sharply into focus. This is an issue for many business sectors, including PR, where most agencies are small/ medium size enterprises and where funds could perhaps be put to better use elsewhere.

Below we set out some potential solutions for SMEs wanting to revise their current occupational arrangements.

Termination and renegotiation

Where companies are looking to downsize or relocate then in some instances the flexibility to do so will be built into the lease. There may be a break clause that can be exercised or indeed term expiry may be imminent. Where tenants want to leave then this is straightforward. Where there is a desire to remain in a premises in these circumstances then the shift in the market affords tenants an opportunity for a renegotiation which may allow tenants to seek to reduce rents, increase rent free periods, cap service charges, limit repair liability with schedules of condition or embed even greater flexibility in any new arrangement  - for example with rolling break clauses and relaxed alienation provisions.

Solutions for existing arrangements

Many companies will be tied into longer term arrangements and so the solutions are not quite so straight forward. Where a landlord is cooperative (and sympathetic) then an early surrender may be an option. This would need to be commercially negotiated and ordinarily a significant premium would be payable. A landlord may also be willing to consider a reduction in rent where a tenant is willing to enter into longer term commitments. The tenant could therefore vary its current lease to reduce the rent whilst simultaneously entering into a new lease with a future start date - thereby extending the term.

Where landlords are not willing to entertain any form of negotiation then tenants can look to the alienation provisions in their leases. Reducing space and subletting part may be an option in order to reduce costs. If tenants want to exit their arrangements completely then they may look to assign the lease to a third party. This will require landlord consent and in some instances a guarantee from the exiting tenant in respect of the lease obligations.

Alternatives

If SMEs move away from traditional lease arrangements then it may be that shared office or licence arrangements will become the norm. This market is increasing rapidly and allows tenants to book spaces as and when needed in order to keep costs to a minimum. Semi-permanent shared offices spaces are also on the increase whereby tenants can have some continuity in the space they use but where they can reduce floor area/terminate arrangements if and when needed. In some cases it may be that employees are required to work from home full time essentially removing the cost of working spaces almost entirely.

Chris Barkley is a senior associate in the real estate team at Goodman Derrick LLP, the London law firm.

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