As the region pushes towards economic recovery following Covid-19, companies are again focusing on their office accommodation requirements. Whilst demand is varied across different locations with UAE, sophisticated tenants are making increasing demands of their landlords in terms of flexibility and to enable them to adapt to the new way of working, recognising that a hybrid of office and home working is the new normal. Such businesses see their landlords as part of their supply chain and expect them to offer flexibility in exchange for the benefits that a high-quality, long-term commitment that a reputable tenant can provide a landlord. Below are some key conditions requested by tenants.
Financial incentives
A reduction in rent is the most obvious financial incentive that a tenant may seek, and certainly there are discussions around this ongoing in the market, although in well-located, high-quality buildings there may be less flexibility to reduce rent on the part of the landlord.
Agreeing on a lower rent, however, can have an impact on the landlord beyond cash flow. And in particular where a landlord has debt financing, they may be under an obligation not to reduce rent beyond a certain level without getting consent from the lender. In such circumstances, alternative financial incentives that a tenant may require from a landlord, which create long-term value for the tenant without severely impacting the landlord’s overall position include:
- Service charge caps in multi-occupied premises, although tenants will typically wish to ensure that service provision is not impacted by any reduction to service charge costs. However, a cap can create a shortfall which the landlord will typically have to fund from their own resources (as opposed to using the funds collected from other tenants in the building), so this is likely to be of a limited duration.
- Fit-out contributions from a landlord – including on a renewal where a tenant may be seeking to reconfigure its premises to reflect the new way of working by having more collaboration space and more distancing between workers. A fit-out contribution may appear to have the same economic impact on the tenant as a reduced rent. However, from an accounting perspective there can be advantages for both parties to an incentive being structured in this way.
- Rent-free periods, which provides the tenant with the benefit of lower outgoings while undertaking its fit-out (or alterations if relating to a renewal).
Reinstatement and repair
Tenants are also looking for landlords to provide flexibility while handing back premises. Tenants are seeking to hand back the premises “as is”, with the reinstatement obligations waived, and without the need to repair any “fair wear and tear”. The waiver of the reinstatement obligations provides tenants with a future saving, but may also in fact be of benefit to the landlord where the tenant’s fit-out is of high quality and could be used by an incoming tenant (thereby potentially increasing the value of the premises to the landlord).
Break options and transfer rights
From the tenant perspective, global economic uncertainty means that signing up to a longer lease without any flexibility is no longer palatable. Greater flexibility in the form of an early break option (where the tenant is allowed to end the lease early) or rights to transfer the lease (or sublet) are becoming more common. However, there remains some market resistance to subletting and transfers, particularly in locations where landlords have a wealth of unlet stock. A compromise position is to have a break option along with a compensation payment to the landlord (which in most cases will still be a better economic outcome for a tenant) as opposed to paying rent for the remainder of the lease.
Flexibility of leased space
Economic uncertainty, and the recent experience of offices sitting empty through the pandemic, has meant that tenants are reassessing how much space they need. This has led to tenants requesting rights to flex their space, either through rights of first refusal or partial break rights. Rights of first refusal provide tenants with the ability to expand their operations smoothly. If the landlord has premises that can accommodate such flexibility, then there is little downside in offering this to a tenant. In either circumstance the parties do need to ensure that the agreement is very clear and the landlord gives consideration to the long-term impact of making such concessions.
Suspension of rent?
The impact of Covid-19 meant many tenants were unable to operate from their leased premises and had to ask landlords for concessions at the relevant time (rather than being entitled to them under their leases). In practice, any suspension of rent that was typically granted was on the basis of a mandate from the relevant authorities. Accordingly, tenants now are increasing requests for contractual relief in case the same occurs again in the future. However, successful requests for the contractual right to the suspension of rent in the event of a pandemic in commercial leases remain scarce. We have not yet seen a significant number of landlords willing to take this risk. The evolution of the business interruption insurance market post-Covid-19 will be a factor in determining whether such provisions ever become “usual”.
Louisa Lynch, real estate partner at Norton Rose Fulbright Dubai
by Staff Writer
More of this topic
UAE tenants have new demands from landlords amid coronavirus recovery
Whilst demand is varied across different locations with UAE, sophisticated tenants are making increasing demands of their landlords in terms of flexibility and to enable them to adapt to the new way of working, recognising that a hybrid of office and home working is the new normal
Louisa Lynch, real estate partner at Norton Rose Fulbright Dubai
As the region pushes towards economic recovery following Covid-19, companies are again focusing on their office accommodation requirements. Whilst demand is varied across different locations with UAE, sophisticated tenants are making increasing demands of their landlords in terms of flexibility and to enable them to adapt to the new way of working, recognising that a hybrid of office and home working is the new normal. Such businesses see their landlords as part of their supply chain and expect them to offer flexibility in exchange for the benefits that a high-quality, long-term commitment that a reputable tenant can provide a landlord. Below are some key conditions requested by tenants.
Financial incentives
A reduction in rent is the most obvious financial incentive that a tenant may seek, and certainly there are discussions around this ongoing in the market, although in well-located, high-quality buildings there may be less flexibility to reduce rent on the part of the landlord.
Agreeing on a lower rent, however, can have an impact on the landlord beyond cash flow. And in particular where a landlord has debt financing, they may be under an obligation not to reduce rent beyond a certain level without getting consent from the lender. In such circumstances, alternative financial incentives that a tenant may require from a landlord, which create long-term value for the tenant without severely impacting the landlord’s overall position include:
Reinstatement and repair
Tenants are also looking for landlords to provide flexibility while handing back premises. Tenants are seeking to hand back the premises “as is”, with the reinstatement obligations waived, and without the need to repair any “fair wear and tear”. The waiver of the reinstatement obligations provides tenants with a future saving, but may also in fact be of benefit to the landlord where the tenant’s fit-out is of high quality and could be used by an incoming tenant (thereby potentially increasing the value of the premises to the landlord).
Break options and transfer rights
From the tenant perspective, global economic uncertainty means that signing up to a longer lease without any flexibility is no longer palatable. Greater flexibility in the form of an early break option (where the tenant is allowed to end the lease early) or rights to transfer the lease (or sublet) are becoming more common. However, there remains some market resistance to subletting and transfers, particularly in locations where landlords have a wealth of unlet stock. A compromise position is to have a break option along with a compensation payment to the landlord (which in most cases will still be a better economic outcome for a tenant) as opposed to paying rent for the remainder of the lease.
Flexibility of leased space
Economic uncertainty, and the recent experience of offices sitting empty through the pandemic, has meant that tenants are reassessing how much space they need. This has led to tenants requesting rights to flex their space, either through rights of first refusal or partial break rights. Rights of first refusal provide tenants with the ability to expand their operations smoothly. If the landlord has premises that can accommodate such flexibility, then there is little downside in offering this to a tenant. In either circumstance the parties do need to ensure that the agreement is very clear and the landlord gives consideration to the long-term impact of making such concessions.
Suspension of rent?
The impact of Covid-19 meant many tenants were unable to operate from their leased premises and had to ask landlords for concessions at the relevant time (rather than being entitled to them under their leases). In practice, any suspension of rent that was typically granted was on the basis of a mandate from the relevant authorities. Accordingly, tenants now are increasing requests for contractual relief in case the same occurs again in the future. However, successful requests for the contractual right to the suspension of rent in the event of a pandemic in commercial leases remain scarce. We have not yet seen a significant number of landlords willing to take this risk. The evolution of the business interruption insurance market post-Covid-19 will be a factor in determining whether such provisions ever become “usual”.
Louisa Lynch, real estate partner at Norton Rose Fulbright Dubai
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