The commercial real estate sector has experienced a rapid pace of change in recent years and factors such as the rise of online shopping, flexible office space and a changing warehousing landscape are all causing businesses to reassess their physical footprints.
However, it is important for property directors to recognise that opting to share a portion of real estate as part of a ‘right-sizing’ move could expose their businesses to certain risks.
Threats to corporate reputation, relationships breaking down and property damage and neglect are among the issues that should be considered.
Firms must find ways to mitigate these risks.
Freeholders are afforded a large degree of freedom when setting up a right-sizing agreement and, luckily, landlords are becoming increasingly flexible when it comes to finding additional uses for commercial property.
Retaining tenants is crucial for many landlords, and if openness to right-sizing could result in a tenant extending their lease, this is likely to be a good attitude to adopt.
Main financial burden
When considering this new kind of move, it is important for freeholders and main leaseholders to note that the main financial burden of repairs, maintenance and bills will still be their responsibility. With this in mind, it is crucial that they create a clear agreement with any potential tenants or sharers and it is worth considering whether the financial gains received through sharing real estate outweigh the potential increase in cost for repairs.
Rather than the rigid terms and conditions set out in a traditional lease, right-sizing partnerships are normally based on a licence agreement or tenancy at will, offering a greater degree of customisation. In order for a right-sizing move to be successful, every party must communicate their individual requirements of the arrangement clearly.
The agreement needs to meet the practical expectations of people on the ground because if the foundations of the arrangement are not suitable for either party, there may not be anything to fall back on should the partnership fail.
One of the most important aspects of the agreement is the clear communication of financial liabilities. For example, property directors need to consider which costs will be passed on to the sharer and what the procedure will be if a rent review occurs.
However, these considerations are overshadowed by an even more important factor - successful right-sizing agreements need to be based on mutually beneficial agreements and require businesses to work with partners that complement and can add to their existing offering.
Adrian Bland is partner and head of commercial real estate at Shakespeare Martineau
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