Short Leases boost Commercial Returns but harder work for landlords

The commercial property market has performed well in recent years, although trends differ from inner city and local markets, reports Dutton Gregory Solicitors. 

Commercial bodies have noted that the supply of office space is increasing within cities. Supply currently exceeds demand, resulting in a rising vacancy rate. 

However, Dutton Gregory says the option for businesses to sign up to shorter leases in towns, villages, and rural locations is working to reduce void periods. It was recently reported that more than half of businesses have opened offices or working spaces outside city centres, in response to the shift towards hybrid working.

There’s a very active local market outside of London, with the firm noting that post pandemic, many businesses are now signing up for shorter term leases, reflecting business plans that only project for the next three to five years. With assessments on productivity since the adoption of hybrid working showing no real change in output per person from the pre-pandemic era, it is likely more businesses will carry on with this trend. 

While this has meant commercial office spaces are less likely to remain empty for extended periods of time, this has resulted in more work for landlords, who now need to consider marketing and fitting out their commercial properties more frequently.  

Derek Austin, partner in commercial property at the Dutton Gregory Surrey office, says: “Post-pandemic, we have now noticed that our new instructions support the market trends reported widely by local commercial agencies. For example, with businesses adopting hybrid working, many only want to commit to renting out office space for a few years, as opposed to making commitments of 10 years or more. This has resulted in properties having a reduced void period, which is positive for local footfall. Compared to the major UK cities and towns, office spaces in villages, and rural locations are typically vacant for a shorter period, as businesses are increasingly wanting to be more localised.

“However, for commercial landlords, this has meant they have to market more regularly and potentially fit out their office space more so than they would have done 10 years ago. With increased financial outgoings for landlords, we are likely to see rents continue to increase, which could dampen the market. There is no doubt that in the current economic climate, it’s difficult for commercial property landlords and investors to predict future trends.

“The way of working is drastically changing, and businesses want to ensure flexibility, hence the shorter leases, as businesses are having to adjust to fit with the changing trends, work patterns and hybrid working. It not only benefits businesses financially, but also makes sense for their workforce. Landlords may have to seek more sustainable forms of fit-outs and interior refreshes for their commercial buildings, to minimise the impact to the environment.  

“Short term leases often require extensions or renewals, when landlords should be alert to the risk of creating a protected business tenancy or falling foul of mortgagees’ requirements.  The Tenant seeking to renew a lease may need to consider if SDLT lease duty has become payable, so early legal support and specialist advice should always be sought.”