The rise in short-term leases on the back of the pandemic is something the commercial property sector should embrace. Shorter-term rental agreements offer greater opportunities for independent and start-up retailers.
While the pandemic has impacted major retailers, as seen in the headline news, there has been a renewed focus on shopping locally and supporting new stores.
Previously driven to the outskirts of towns, the movement of big-name multiples or nationals to online platforms offers unique opportunities for independent stores to capitalise on these new favourable rental agreements. The vibrancy and diversity these businesses can bring to town centres will help foster a renewed community focus and drive the commercial property sector forwards.
Short-term leases also provide office-based businesses greater flexibility to manage their company finances based off their current needs. Short-term six-to-12-month rentals are ideal for many of these businesses as they look to progress in the post-Covid world, and can help businesses have a better understanding of their costs when it comes to annual financial planning.
They can provide unique opportunities for the landlord to develop strong tenant/landlord relationships that could lead to longer-term agreements once they have a greater understanding of their needs post-pandemic. Flexibility from landlords and lenders is key to driving tenant relationships, particularly in relation to leasing terms.
The flexible relationship between lenders and landlords will be crucial for new growth in the sector, post pandemic. Traditionally, lenders and landlords have operated largely independently of one another, with landlords being responsible for negotiations with tenants based on an agreed covenant formulated by them and the lenders.
As tenant leases change with the movement to short-term leases, the role of the lender will need to be more flexible to allow for adjustments based on the projected forecasts of tenants and any potential future lockdown-esque closures.
Usually, lenders work closely with landlords to agree on a defined covenant that outlines the terms to any loans being given to the landlord. Covenants can include a vast range of different thresholds that need to be considered by landlords, ranging from the minimum rental price, interest coverage ratios and maximum debt-to-asset ratios. These covenants are legally binding and are in place by lenders to protect themselves in the eventuality that a landlord must default on their loans.
With the disruption of the pandemic and the implementation of the Coronavirus Act 2020, landlords have been unable to evict tenants for unpaid rent for leases over six months.
