As part of The Sherrards Training Academy, we have asked our Legal Assistants and Trainee Solicitors to write articles to support their learning, and also to ensure they start building their own personal brand. This article has been fact-checked and proofread by London-based Commercial Property Partner, Guy Morgan.

The UK’s commercial property sector has been undergoing huge transformation as ‘sticky’ higher interest rates have reshaped the market. Historically low interest rates for more than a decade up to 2022 led to a surge in property investments and development projects. However, interest rates increased sharply throughout 2022 and peaked at 5.25% for the period from August 2023 to August 2024. They now stand at 4.5%. Up until the seismic stock market turbulence of the last few weeks, there was speculation of further rate cuts during 2025, with rates predicted to possibly end 2025 at the 4% mark. However, with market uncertainty having been hugely exacerbated since 2^nd April, the spectre of a potential world recession looms large. Against this volatile backdrop, it now looks increasingly likely there will be more (and potentially larger) interest cuts in 2025 than had been initially anticipated. Indeed, many economists are currently predicting 2025 ending with rates of between 3.5% to 3.75%. If these speculative rates turn into reality, this will be a welcome relief to landlords, tenants and investors who have all been facing higher financing costs and a shift in lease dynamics.

Impact on property values

Higher interest rates have had a direct impact on commercial property values. When financing becomes more expensive, the cost of acquiring and possessing property rises. This causes a downward pressure on valuations.

The volume of transactions has also slowed significantly since mid-2024. Investors who previously relied on cheap borrowing to secure deals are now more cautious, resulting in reduced demand for commercial properties. Office and retail properties, which were already under pressure due to changing post-Covid work patterns and consumer habits, have been hit particularly hard. Office space transactions have dropped by 20% year-over-year, while retail transactions have fallen even more sharply: by around 25%. The combination of higher capital costs and economic uncertainty has made investors more hesitant.

That said, relatively high interest rates have prompted a shift in investor preferences toward more stable, long-term assets. Industrial properties, for example, have become increasingly attractive. The rise of e-commerce and growing demand for efficient supply chains have made logistics and industrial properties a safe bet for capital deployment, despite higher financing costs.

Borrowing Costs: Challenges for Landlords and Developers

Landlords with loans maturing in 2025 are being cornered to refinance at much higher rates, which consequently leads to increased debt-servicing costs.

For developers, these higher financing costs have curbed new development activity. With only high-cost capital to fund projects, margins are thinner, and the financial risk is greater.

Shift in Lease Negotiations and Rent Expectations

With the transformation of the commercial property market, we are seeing an increase in tenants pushing back against landlords to secure more favourable lease terms.

• Shorter Lease Terms –  Where we have been used to seeing 10 to 20 year lease terms, many tenants are now seeking 3 to 5 year terms, with flexibility as to break clauses. This reflects the broad economic volatility of the market and a desire for greater flexibility.
• Fixed or capped rent increases – With inflation still elevated (the Consumer Prices Index currently lies at 2.6%), tenants are negotiating for fixed or capped rent reviews to avoid steep future costs. Some landlords have agreed to tie rent increases to more predictable measures, such as the Consumer Prices Index or a fixed percentage increase, rather than open market reviews.

At the same time, landlords, face their own cost pressures. To offset against these financing costs, many are seeking to increase, if not, maintain their rental yields. This naturally creates tension between landlords and their tenants.

Opportunities Amidst the Challenges

Those with access to cash or alternative methods of financing are positioned to take advantage of the opportunities that have arisen amidst these challenges.

Cash buyers are gaining a competitive edge in the current market. With higher borrowing costs negatively affecting debt-reliant buyers, those with capital reserves can acquire assets at more attractive valuations.

Although the British Pound has been volatile in recent years, this has heightened the attractiveness of UK commercial property for foreign investors: the weaker Sterling is, the greater the purchasing power of certain international buyers. Essentially, with a weak currency, UK assets are more ‘affordable’ in relative terms.

Alternative financing models, such as private equity, joint ventures and debt funds are also increasingly popular, to fill the growing funding gap. These flexible structures are helping developers and landlords operate within the higher-rate economic environment.

The UK’s commercial property market is undergoing tremendous change. It now looks inevitable interest rates will drop ‘further and faster’ in 2025 than had been previously forecast due to the inflammatory geopolitical situation. This will provide many with some respite, on one level, although those who are refinancing will face repayments that are still significantly higher than they were, pre-2022.

Investors are also likely to look to UK commercial real estate as a safer haven for investment than equities and bonds.

Those who can adapt their strategies, whether through alternative financing, renegotiating lease terms, or targeting resilient asset classes, will be well positioned to navigate this evolving landscape. Flexibility, foresight, a deep understanding of market fundamentals and pure luck will be essential in 2025. Whilst the commercial property market has been under pressure, there remain opportunities.

To find out more, please contact the Commercial Property team.

 

As part of The Sherrards Training Academy, we have asked our Legal Assistants and Trainee Solicitors to write articles to support their learning, and to ensure they start to build on their own personal brand. This article has been fact-checked and proofread by Senior Associate in Commercial Property, Chris Piggott.

Overview

Amidst the LinkedIn chaos that has ensued following the 2024 Autumn Budget, the first for the Labour Government in 14 years, we must remember to appreciate the small wins:

The Chancellor has announced a 1p cut on draught pints.

Apparently, the average pint in London costs £5.59, therefore if you buy 559 pints you get your 560th completely free!

Down to brass tax…

Key Changes Affecting Businesses

The Chancellor’s increase in Capital Gains Tax for both basic and higher rate taxpayers to 18% and 24% respectively, isn’t huge, but it’s enough to make selling assets a bit pricier, especially for those engaging in Merger and Acquisitions. Higher CGT reduces post-sale profits, potentially making deals less appealing. Business Asset Disposal Relief will gradually rise to 14% in 2025 and 18% by 2026, pushing entrepreneurs to weigh exits more carefully. The result? We might see businesses holding assets longer or exploring tax-efficient deal structures.

Employers are bracing for a 1.2% increase in National Insurance contributions, bringing the rate to 15% by 2025, with the threshold reducing from £9,100 to £5,000. This move significantly raises costs, particularly for SMEs. On the bright side, the Government is raising the Employment Allowance to £10,500, allowing over 865,000 employers to avoid NICs altogether, which should help soften the blow. Still, many businesses will need to rethink their budgets to help navigate these changes.

Businesses in the retail, hospitality, and leisure sectors are set to benefit from a significant 40% reduction in business rates, providing a much-needed boost to their financial health. However, this relief is tempered by the rise in National Insurance Contributions to 15% and the reduced threshold, which may pose challenges. Additionally, the increase in the National Living Wage to £12.21 highlights the commitment to fair pay but may require businesses to reassess their hiring and staffing strategies to adapt to the changing economic landscape.

Impacts on Individuals

The Budget has introduced targeted measures aimed at supporting low-income households, focusing primarily on savings incentives and adjustments to benefits. The Help to Save scheme has been extended until April 2027, allowing low-income earners and Universal Credit recipients to save up to £50 per month. Participants can earn a 50% government bonus at the end of the second and fourth years, potentially accumulating as much as £1,200 over four years. However, the eligibility criteria may leave out some individuals in financial hardship, such as self-employed workers and those not claiming Universal Credit, even if they are on a low income.

Additionally, deductions from Universal Credit will be reduced from 25% to 15% of the standard allowance under the new Fair Repayment Rate. This change is expected to benefit around 1.2 million households, enabling them to retain an average of £420 more each year.

For employees, the budget brings positive news, notably a 6.7% increase in the National Living Wage, raising it to £12.21 for those aged 21 and over. However, this increase also puts pressure on small businesses, which will face higher National Insurance contributions, potentially complicating their hiring strategies. While the budget aims to improve employee wellbeing, businesses will need to adapt strategically to manage these new financial challenges.

Conclusion

The 2024 Autumn Budget is a mixed bag for businesses and individuals alike! On one hand, the push for higher wages and targeted support for crucial sectors is a step toward fairer working conditions. On the other hand, the rise in operational costs might be a bit of a pinch, especially for smaller enterprises.

As everyone adjusts to these changes, the key will be finding that sweet spot between meeting new regulations and keeping the workplace vibe positive and engaged. Here’s to navigating this new landscape with creativity and resilience!

The event is similar to a school sports day, where different businesses battle it out for the coveted Elifar Foundation Trophy. Teams engage in friendly competition while raising money for a noble cause.

Elifar (Every Life is for a Reason) is a small charity dedicated to enhancing the care, facilities and equipment available to profoundly disabled children and young adults, whether at home or in residential care. The charity funds the purchase of a wide range of highly specialised equipment that would otherwise be inaccessible due to financial constraints. Our Partner Steph Kierans is a proud Ambassador for Elifar.

This year, Sherrards entered their team of 7, led by Team Captain Tabeer Hussain, Solicitor in the Corporate and Commercial Team. The team included: Erin Gibbs-Charles, Daniel Gibson, Amanda Newman, Mike Jenkins, and Abby Cowan.

The day was held at Beaconsfield Rugby Club, which was kindly arranged by Neil Hockins, who is a trustee for the Elifar Charity and a valued client of the firm.   

The team competed in a range of activities throughout the day:

• The Quiz, a typical pub quiz where sporting knowledge, flag knowledge and  knowledge of the 7 new and old wonders of the world were tested.
• Auzzie Sling Shot, a race where participants had to dress as kangaroos and complete an obstacle course to collect beanbags to then slingshot to score points.
• The Pin Game, a test of UK city knowledge.
• Volleyball, a game of two teams hitting the ball over the net. 
• Tug of War, a test of strength for our lawyers!
• The Gutter, feeding a range of different sized balls from one basket to another using different sized gutters to pass them along.
• The Cornhole, throwing a beanbag into an inclined wooden board with the aim to get it either on the board or through the hole.
• Hungry Hippos, a giant inflatable ring, where you are tied up with bungee rope and have to collect as many balls as possible from the middle.
• Top Spin, table tennis with a twist. Instead of a typical table tennis table – the table was round.
• The Hock, a test of your hand eye co-ordination. Half your team throwing to score points, and the other half of the team catching the opponents throws to score points.
• The Tourist, a test of your London knowledge. One team player gets given a card of a location in London and has to communicate it through mime, humming or drawing a picture. Once the location has been guessed you have to try and place this on an empty map of London.
• Giant Jenga, in 3 minutes you have to build the tallest Jenga tower! The higher you get, the trickier it gets to build!

In the evening, the team were treated to a BBQ before the results and award ceremony.

Despite not bringing back the trophy, Tabeer Hussain won Captain of the day.

It was a fantastic day out for the team and helped to raise a quarter of the charity’s yearly earnings. This has allowed the charity to open up their grant applications to help support more children and young adults across the year.

Otiumberg Limited is a London based jewellery company founded in 2016 by sisters, Christie and Rosanna Wollenberg. The jewellery collection has a global reach and is championed by luxury retailers such as Liberty London. The collection features quietly confident and intimately beautiful pieces that are designed by the sisters in recycled solid gold, gold vermeil and sterling silver. The collection is also known for its personalisation offer.

Otiumberg has quickly outgrown their showroom in London Bridge which could only be visited by appointment only bookings. Now, with the help of Steph Kierans, the sisters have established a new flagship space in which they can host clients and display the collection publicly.

Rosanna Wollenberg said “thank you for being such a legend (Steph) and holding my hand through this.”

We are really pleased that Steph was able to support the sisters through this journey, and we look forward to visiting their new store.

To find out more or contact the Commercial Property team click here.

All of this may prompt a pick-me-up for deal activity in both the commercial and residential sectors. There will also be a number of regulatory changes to keep up with in 2024, but with a general election on the cards, making accurate predictions of what will happen in the sector and what the legislation will end up looking like is probably best avoided.  What we can safely do is provide a rundown of some of the more significant developments in property law expected in 2024, with the finer details to be fought over in Parliament.

Leasehold and freehold reform

The Leasehold and Freehold Reform Bill will enable leaseholders to extend leases to up to 990 years, abolish marriage value and also limit ground rent. These changes will make it cheaper and easier for leaseholders to extend leases or buy the freehold or share of the freehold.

Renters reform

The Renters Reform Bill is likely to come into law this year, and it will make significant changes to the way in which landlords let properties to tenants.  This is the one promising the abolition of so called “no fault” evictions, but the reforms have been delayed due to the lack of a framework for the courts to deal with the proposed new eviction process.

Ending of lower residential stamp duty

The increase of the residential nil-rate tax threshold from £125,000 to £250,000 will end on 31 March 2025.  This means that buyers will go back to paying the full amount of stamp duty next year.  This may result in an increase in transactions towards the end of 2024 and the beginning of 2025, before the lower rate ends.

Building safety

The Building Safety Act 2022 brought in several measures intended to make buildings and residents safer, in light of the Grenfell tragedy.  In October, a number of measures were brought into law, which now relate to all projects, not just high-risk buildings.  The regime is complex and specialist advice should be sought when building or re-developing property.

Biodiversity net gain

Intended to ensure that development has a measurably positive impact, or “net gain” on biodiversity, developers must deliver a BNG of 10%. This means a development will result in a better quality natural habitat than there was before development. New BNG rules came into force for most new developments from January 2024. Draft regulations and government guidance were published at the beginning of December.          

To find out more, contact Chris Piggott or get in touch with law@sherrards.com. 

This ambitious expansion was flawlessly orchestrated through a strategic alliance with the Commercial Property team at Sherrards, under the guidance of Terry Fendt.

PLAYGROUND Brand’s Dance Legacy Broadens Its Horizon. Boasting acclaimed studios in LA, Playground London stands as the newest addition to the illustrious PLAYGROUND Brand, gearing up to offer master classes and dynamic daily sessions helmed by industry-leading choreographers.

Seamless Expansion: Thanks to the diligence and expertise of the Commercial Property team, Playground LA Limited secured a smooth lease agreement, culminating in a mid-July completion. With eager anticipation, PLAYGROUND LONDON is poised to swing its doors open on Oct 2nd!

Frequented by stars like Jennifer Lopez and Justin Bieber, and associated with brands such as Nike and Adidas, Playground LA’s legacy is set to continue in London. Dive into the PLAYGROUND brand and check out PLAYGROUND LONDON.

Erin, a trainee solicitor in our Dispute Resolution team, explores the recent judgment in BMW (UK) Ltd v K Group Holdings Ltd highlighting the balancing act required in respect of a landlord’s business aspirations and a commercial tenant’s rights when negotiating break clauses in a lease.

Introduction

The realm of commercial leases is a complex landscape governed by legal provisions aimed at balancing the interests of both landlords and tenants.

One such provision that plays a pivotal role in commercial lease agreements is the break clause.

Break clauses in a commercial lease are provisions that allow either the tenant or the landlord to terminate the lease before its designated end date. These clauses offer flexibility within the lease agreement, allowing parties to adapt to changing circumstances or business needs.

However, a recent decision in the County Court highlighted the difficulties that landlords can face when seeking a break clause for their business needs in a renewal lease protected by Part II of the Landlord and Tenant Act 1954 (the Act).

BMW (UK) Ltd v K Group Holdings Ltd

The case concerned a car showroom in Mayfair, demised under four separate leases from the landlord, K Group Holdings Limited, to the tenant, BMW (UK) Limited.

These leases were subject to renewal proceedings under the Act and therefore, were to be granted on essentially the same terms as the previous leases.

The previous leases did not, however, contain a landlord break option. Accordingly, the onus was on the landlord to demonstrate the proposed terms were fair and reasonable and should be granted. 

If a break clause was to be included, the landlord accepted that it would have to prove a ground of opposition under s30(1) of the Act in order to exercise the break option.

HHJ Monty KC, in considering whether to grant a break clause, made it clear that the court must try and strike a balance “between granting a reasonable degree of security to the tenant on the one hand, and not preventing the landlord from recovering possession if one of the statutory grounds can be proved on the other”.

Section 30(1)(g) – Landlord’s intention to occupy the premises for the purpose of a business to be carried on by the landlord

The relevant ground in this case was ground (g), namely that on termination of the tenancy, the landlord intends to occupy the property for the purposes of a business to be carried on by the landlord.

The renewal leases themselves were unopposed and so it was for the landlord to prove that they would be able to establish ground (g) at some point in the future when exercising the break option. That is, the landlord needed to show a bona fide intention to operate the break clause if one was granted.

When giving evidence, the landlord agreed that a car business would be an entirely new business for K Group Holdings Ltd. It was further contended by the landlord’s witness that members of his family who controlled entities within the same group as the landlord were only a “little bit inclined to have a study and see the possibilities” of the electric car market. 

In this case, the landlord’s inadequate evidence and the effect the break clause would have on the tenant meant that the court found in favour of the tenant in refusing the inclusion of the landlord’s proposed break clause.

Practical considerations

This decision highlights the raising of the bar in respect of the landlord’s intention to exercise a break option, particularly where the landlord may have aspirations to start a new business venture or expand an existing one.

A landlord should ensure they can evidence a real intention that the operation of the break clause is more than a vague possibility. Therefore, evidence of any steps taken to progress the possibility of occupation for the purpose of a business would be worth documenting.

Although a complete and comprehensive business plan may not be required, the landlord should seek to substantiate any request for a break clause with supporting evidence detailing any “genuine and workable” intention to occupy the premises.

Sherrards’ Real Estate Litigation team

This article has been fact-checked and authorised by the Head of the Residential Real Estate, and Training Partner Asha Ngai. If you have any questions or thoughts, please reach out to him by clicking here.

Our Real Estate Litigation team can support you with an entrepreneurial, commercial and considered approach to break options to help you achieve your goals. Our specialist team can advise you on your options, including, where appropriate asking the court to determine the matter.

For advice and assistance, contact the Real Estate Litigation team at Sherrards.

Minton Care Homes is a family-run and specialist provider of residential and dementia care in the Hertfordshire and Norfolk areas.

The Sherrards Corporate team supported Minton Care Homes in the targeted acquisition of their second care home, Thurleston House, based in Ipswich, and the operating business which has since been added to Minton care Home’s growing portfolio.

The team at Sherrards assisted with the transfer of the home from the previous care provider to Minton Care Homes as well as notices and correspondence with CQC.

The team worked closely with colleagues across departments in both our Employment department and our Commercial Property department, to help our clients and ensure the acquisition was a success.

To find out more about Minton Care Homes, please click here.

A huge congratulations to Esquires Coffee who have recently celebrated the opening of their newest store in Brackley.

Esquires Coffee is an ethical coffee chain with a community spirit, and have over 50 stores across the UK and Ireland.

Our team, led by Terry Fendt, assisted the Esquires team with their new commercial lease.

To find out more about Esquires, click here: https://esquirescoffee.co.uk/

As detailed in our previous article, as a result of the Covid-19 pandemic the Government implemented The Coronavirus Act 2020 which, amongst other things, offered protection to Tenants of commercial premises by imposing a moratorium preventing Landlords exercising most of the usual remedies for the recovery of rent arrears. A lot has happened since then, but where we are now?

The Commercial Rent (Coronavirus) Act 2022 (“the Act”)

The moratorium imposed by the Government expired at the end of March 2022.

To prevent Landlords taking immediate action in relation to outstanding arrears, the Government implemented the Act, which offered a further period of protection to Tenants, preventing Landlords from exercising their usual remedies in relation to ‘Protected Rent Debts’, those being rents due under a tenancy between 21 March 2020 and 18 July 2021 when the business in question was subject to a closure requirement.

The Act implemented an arbitration scheme which entitled both Landlords and Tenants to refer matters to an Arbitrator to decide whether the Tenant was entitled to relief in relation to their protected rent arrears, but the deadline for the matter to be referred to arbitration was 25 September 2022.

Beyond 25 September 2022

In the event either Landlord or Tenant did not refer the matter to arbitration by 25 September 2022, all protection offered by the Act in relation to the rent arrears is lost.

The result being that a Landlord could exercise their usual remedies (as set out below) and, irrespective of the financial position that the Tenant is in as a result of the Covid-19 pandemic, it could not use is it as a defence to any claim or remedy exercised by the Landlord.

This will be welcome news for Landlords of Tenants who, despite being in strong financial positions, have refused to settle arrears on the basis that the Act afforded them protection.

Tenants still in arrears who were reliant upon the protection of the Act and did not refer matters to arbitration should be conscious of their vulnerability to any of the remedies available to the Landlord.

Options for Landlords

Now that it is “open season” in relation to commercial rent arrears, Landlords should ensure they seek advice as soon as possible in relation to the outstanding arrears. Taking steps to recover the debt sooner, rather than later, will improve the likelihood of recovery and avoid further arrears accruing which may see the Landlord recover pence on the pound in the event of the Tenant becoming insolvent.

As a brief reminder, some of the options open to Landlords are:

 

• Forfeiture of the Lease – however, Landlord’s will need to ensure that they have not waived their right of forfeiture in respect of the previously protected arrears before forfeiting the lease;
• Issuing Court proceedings for the recovery of the debt;
• Commercial rent arrears recovery (CRAR);
• The service of a statutory demand and the subsequent presentation of a winding-up petition; and
• Pursuing former tenants that are subject to an Authorised Guarantee Agreement and/or pursuant guarantors

If you would like any assistance in relation to issues relating to commercial rent arrears, please contact Paul Marmor.