COVID-19 and Covenant Breaches in Leases and Loan Facilities
On 16 March 2020 Number 10 advised those living in the UK against “non-essential travel” in order to curb the growing outbreak of Coronavirus. This encouraged many office-based businesses to communicate to their employees that they should work from home until further notice. Whilst many people and businesses envisaged working from home as a temporary solution, those in office-based jobs are now well over a year into non office-based working.
Since the government’s lockdown announcements of early last year, the city of London has been particularly bereft of the footfall of office workers. Having only returned to Kingsley Napley’s office a couple of times in the last year, the quietness of Farringdon’s streets on my visits have been in complete juxtaposition with the bustle of the same streets of February last year.
Whilst “freedom day” has arrived, it is starting to become clear that we won’t be returning to the same style of office-based working many city workers were used to pre-pandemic. The multiple lockdowns have clearly quickened the shift in perceptions in the effectiveness of the working from home model.
We can see this trend playing out in the business decisions of some of the city’s stalwarts, the big banks. Of late, the news cycle has been full of stories relating to how some of the big banks are vacating their sprawling office spaces. HSBC recently announced that it is hoping to cut its global offices by around 40% by next year. Most recently JP Morgan has announced that it will need “significantly” less office space in the future owing to a desire to move more permanently to a part-time working from home model.
So what does all this mean for the future of commercial real estate in the city? Well whether or not working from home will be a trend that is here to stay for the long run, it is certainly clear that the forced closure of office spaces owing to the pandemic is already influencing long-term business decisions relating to commercial real estate. As the UK starts to reopen this summer it is clear that many city businesses are planning on adopting a more flexible approach to office-based working. Having identified that there is a greater desire from employees to work at the office for a few days a week and at home for the remainder, many businesses are proposing to implement flexible working models once the city reopens. This in turn will result in many offices not running at full capacity when the city reopens. As a result many businesses may start to see the benefit of cutting back office space so as to save on costs however, it is unlikely that many businesses will not view commercial or more specifically, office real estate as redundant.
Although, perhaps it is worth noting that some businesses are in the processing of adopting working models whereby all employees are expected to be in the office during set days of the week which will amount to requiring the same amount of office space as was used pre-pandemic on certain days of the week, but will also mean that on the remainder weekdays the office may be empty or at the very least, quite a lot quieter.
As the model of full-time office-based working changes, many commercial tenants may consider not renewing their current leases at the end of their term and seeking out smaller premises. Landlords may even start to see a growth in requests from commercial tenants to surrender their leases (i.e. bringing a lease to an earlier end than the term agreed upon in the lease) and requests for shorter lets. Alternatively, if commercial tenants are not able to negotiate a surrender of their lease, they may start looking to underlet part of their leased premises to other businesses. Commercial tenants may even begin to utilise the benefits of co-working spaces and the flexibility of their short-term lets.
It may very well be the case that for reasons of practicality and a desire for in-person collaboration and interaction workforces may be naturally pushed back into greater office-based working once the city has fully recovered from the pandemic. The current trend towards favouring home-working may not be sustainable when offices fully reopen in the long-term. It is possible that the natural challenges of having half of a workforce working from home and the other half working at the office on any given day may become too challenging for businesses to function optimally.
For many young professionals in communal living situations, it is possible that the thought of working from home one more day in the same space they sleep in is too much to handle. Young working professions do not always have luxury of choosing which room to work at home from each day, a luxury which is often enjoyed more by their more experienced colleagues. The opportunity to socialise after work with colleagues has also been lost during the lockdowns, which has traditionally been a big incentive for young professionals to flock to the city. This is perhaps why the take up to return to the workforce has been more popular with young professionals. Many more experienced colleagues with families and homes further out of the city have enjoyed the time spent with family over commuting during the various lockdowns.
However, if there is a greater to return to the office by young professionals, businesses will need to be careful that a disconnect between young and more experienced professionals does not develop. It is in a business’s best interests for the younger workforce to grow, learn and be supported by more experienced colleagues. Not only this but the culture of a business infiltrates from the top down and so it seems clear that businesses will in the end need to encourage as many experienced colleagues back into the office as often as possible. It appears to me, that in time we will likely return to a predominantly office-based model of working, but with perhaps a bit more of (welcome!) flexibility.
Whether or not city workers return completely to the same working habits pre-pandemic, it is clear that office real estate is not a thing of the past.
If you would like to discuss reconfiguring your occupational requirements or any other issues raised in this blog, please contact a member of our team.
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