Frequently, this can be done by means of a Deed of Variation, a relatively simple document either adding, removing or amending specified clauses in a lease.

There are, however, certain scenarios where care should be taken.  These two main scenarios are if the variation required:

(i)            adds to the lease demise (e.g. if the landlord and tenant decide to add a room within a building to the area being leased); or

(ii)           extends the length of the term of the lease term (e.g. changing a four year lease into a five year lease).

Both of these variations are deemed to be so fundamental to the underlying lease that it can only occur by the fiction of the existing lease being surrendered, and a new lease being granted.  This deemed surrender and regrant happens regardless of the intention of the parties, and can arise inadvertently. 

Such a deemed surrender and regrant can cause several issues for both the landlord and the tenant.

 

For the landlord

If the original lease had been validly contracted out of the security of tenure provisions of the Landlord and Tenant Act 1954, an accidental deemed surrender and regrant would lead to the creation of a new lease for which no such contracting out process had taken place.  The landlord would therefore inadvertently have granted a lease with the benefit of security of tenure contrary to their original intentions.  This would severely limit the landlord’s ability to remove the tenant even at the end of the contractual term.

Leases granted after 1 January 1996 are subject to privity of contract provisions of the Landlord and Tenant Covenants Act 1995.  If the original lease was granted prior to 1996, it is extremely unlikely to include clauses relating to Authorised Guarantee Agreements on assignment.  An unintentional deemed surrender and regrant could therefore jeopardise a landlord’s ability to enforce against former tenants in the event the current tenant becomes insolvent.  Equally, a deemed surrender and regrant will release former tenants and guarantors of the existing lease for liability under the new lease.  Both of these weaken the landlord’s position in the event the existing tenant becomes insolvent.

If the landlord has mortgaged their interest, the terms of the mortgage will usually require lender’s consent for any surrender or grant of a lease.  An accidental deemed surrender and regrant would breach such provisions leaving the landlord open to enforcement by the lender.   

If the landlord holds a leasehold interest, the terms of the superior lease may require superior landlord’s consent to a surrender or grant of a sublease.  An accidental deemed surrender and regrant would breach these requirements, which could make the landlord’s lease liable for forfeiture.

 

For the tenant

The tenant may be liable for SDLT (stamp duty land tax) on the new lease.  Even where reliefs such as overlap relief may apply, it is unlikely the tenant will realise the potential SDLT liability in time on an accidental surrender and regrant, and find themselves subject to penalties for late returns or late payment of SDLT.

If the new lease is for a term of seven years or more it is compulsorily registrable at the Land Registry.  For an accidental surrender and regrant, it is likely the tenant will not realise the requirement for registration.  Failure to effect registration at the Land Registry within two months will lead to the legal estate becoming void and the lease taking effect as an agreement for lease under the Land Registration Act 2002.  This is perhaps less likely to occur as the tenant will usually want to register a Deed of Variation in any case, and the Land Registry would pick up on the issue.  Nonetheless, it can take some sorting at the Land Registry and so is best avoided.

If the tenant has mortgaged their leasehold interest, it is likely an accidental deemed surrender and regrant will breach the tenant’s mortgage.

 

Other variations which created a deemed surrender and regrant

Whilst an addition of land to the demise and an extension to the term are the main circumstances in which a deemed surrender and regrant can take place, other variations can lead to a surrender and regrant.  A variation which did not extend the lease term, but which provided the tenant with an option to extend the term was held to create a deemed surrender and regrant. 

 

Avoiding a deemed surrender and regrant

There are ways to document variations so as to avoid a deemed surrender and regrant: e.g. by granting a reversionary lease to take effect at the end of the existing one, or by granting a supplemental lease of the additional area to be added to the demise.

If you have any questions or would like to learn more, please contact Jonathan Broad, Associate in our Commercial Property team.

It’s pretty widely known that the Landlord and Tenant Act 1954 (LTA 1954) grants “security of tenure” to commercial tenants – i.e. commercial tenants (with a few exceptions) have the right to renew their leases when the contractual lease term comes to an end.

However, landlords and tenants can agree to exclude (or “contract out”) that security of tenure when they enter into their agreement for lease or lease by following a (slightly clunky) process. If security of tenure is excluded, the tenant does not have the right to a new lease at the end of the lease term.

What’s happened this year?

The LTA 1954 has been under a microscope this year as The Law Commission consulted on whether to reform it. As a 70+ year old, post war, piece of legislation, with a dramatically different market now from when it was enacted (co-working spaces, increasing hybrid working and pop up retail to name just a few things), it’s not surprising that it may need a refresh – the question is, how extensive should that rethink be (spoiler: not all that extensive as it happens!).

The Consultation

The Law Commission closed its first consultation earlier this year. The Commission received over 160 consultation responses from a wide range of stakeholders, including landlords, tenants, professionals and representative organisations.

The consultation covered a range of questions, including:

1. Whether the current “contracting-out” model of security of tenure should be retained, or a different model be adopted. Different models considered including mandatory security of tenure, abolishing security of tenure, or switching to a “contract-in” rather than “contract-out” system.

Law Society’s provisional conclusion: Retain the current model. Responses were overwhelmingly in support of this; saying that the current model strikes a balance between landlords and tenants and that to change it would unnecessarily disrupt the market.

2. What types of tenancy should benefit from security of tenure under the LTA 1954.

Law Society’s provisional conclusion: The current structure is correct – i.e. the list of tenancies that are not able to benefit from the security of tenure provisions is correct. This list includes agricultural tenancies, mining leases and short-term tenancies (although – see below on those).

3. What duration of tenancy should benefit from security of tenure under the LTA 1954.

Law Society’s provisional conclusion: As mentioned above, short-term tenancies are automatically excluded from security of tenure. Currently, a short-term tenancy for this purposes means a tenancy of up to six months. The consultation asked whether this threshold is appropriate.

The Commission reported that responses on this point were mixed, but generally there was support for increasing the threshold to give greater flexibility in the short-term lettings market. As a result, the Commission plans to hold a second consultation on extending the threshold to two years.

A few thoughts

The provisional conclusions do not indicate a sweeping change to the LTA 1954. The Law Commission’s approach is a pragmatic one along the lines of not breaking something that (on balance) is working.

Having said that (at least from lawyers on the front line, and clients who pay them!), there is a growing frustration with the convoluted aspects of the security of tenure process with its notices, counter-notices, statutory declarations and rigid timelines. At the very least, it would be good to see a more streamlined and modernised process given the age of technology that we are increasingly experiencing.

Next steps

The Law Commission will consult again later this year with a final report to the Government expected in 2026. This consultation will focus on its provisional conclusions from the first consultation and may go into more detail about what any proposed changes would actually look like and whether any transitional rules will be required.

As ever, the devil will be in the detail (and also whether, and how quickly, resulting legislation makes it through to the Government’s agenda).

Until then, we will watch the space….

If you have any questions, or want to find out more. Contact our Commercial Property team, or Claire Chillingworth. 

Effective 1 October 2025, Christopher Piggott has been promoted from Senior Associate to Legal Director. Chris joined Sherrards in August 2023 and has since played an important role in the success of the department, supporting clients and colleagues alike. In his new role, Chris will take on wider responsibilities, including developing and maintaining client relationships, mentoring junior lawyers, and contributing to the continued growth of the team.

We are also pleased to announce that Mike Jenkins has successfully completed his training contract, gained his practising certificate, and qualified as a Solicitor in the Commercial Property team as of the 25^th of September. Mike has demonstrated dedication and commitment throughout his training, and we are delighted to see him progress in his career with the firm.

The Commercial Property team at Sherrards continues to expand and deliver specialist advice to a wide range of clients, both locally and nationally. The promotions highlight our focus on investing in people and ensuring our clients benefit from strong, experienced teams.

Please join us in congratulating Chris and Mike on their fantastic achievements.

Sherrards’ commercial property and corporate team advised The Darkness drummer Rufus Taylor on the purchase of The Shipwrights Arms, a well-known gastropub with four luxury letting suites in the coastal village of Helford near Falmouth in Cornwall which overlooks the beautiful Helford Estuary.

The freehold acquisition marks an exciting new chapter for the property, which has long been a fixture of the local hospitality scene. The venue attracted national media coverage following the purchase, not only for its iconic location but also due to the involvement of Rufus’ father, Queen drummer Roger Taylor, in supporting the transaction.

Sherrards advised on all legal aspects of the acquisition, including property due diligence, negotiation of the contract, and commercial considerations relevant to the site’s future use. The deal involved a heritage property with mixed use and strategic potential, requiring clear and pragmatic legal advice throughout.

Senior Consultant Solicitor, Richard Berns led the transaction for Sherrards, drawing on significant experience in commercial property to guide the process from initial instruction through to completion. Jean-Paul Da Costa led the business aspects of the acquisition working hand in hand with Richard, as they have done many times over the last 30 years.

Sherrards are pleased to have played a role in supporting Rufus on this high-profile acquisition and look forward to seeing how The Shipwrights Arms continues to evolve under its new ownership.

For a taste of what’s to come (and perhaps a pint with a side of rock’n’roll), visit The Shipwrights Arms.

The project involved seven historical buildings at Camden Stables Market, just by Regent’s Canal, a complex site requiring tight coordination. The Sherrards team worked closely with Live Odyssey and other stakeholders to secure vacant possession across all buildings, negotiate and complete the new lease, assist with planning permission and new operating licence, and navigate a range of practical and legal complexities, all within a very limited timeframe to support an immovable launch date.

The buildings’ location, heritage status and the innovative nature of the venue meant that every piece of the puzzle had to fit precisely and quickly. There were plenty of moving parts, but our team handled the negotiations and legal frameworks with clarity and speed, ensuring Live Odyssey could open its doors as planned.

Live Odyssey is an immersive and interactive tribute to six decades of British music, combining live performances, holograms, 3D visuals, and themed bars in a high-tech, multi-room venue. It’s a bold and exciting new addition to London’s live entertainment scene, offering visitors a two-and-a-half-hour journey through the UK’s most iconic musical moments, from The Clash to Queen.

The transaction was led by Senior Associate Christopher Piggott, and the Sherrards team also included Terry Fendt, Partner and Head of the Commercial Property team. Their deep experience with complex, multi-party property transactions – and their calm, practical approach under pressure, helped guide the project through to a successful conclusion.

We’re proud to support such an innovative and culturally significant venue, and we love supporting innovative businesses like Live Odyssey as they redefine what’s possible in live entertainment.

Live Odyssey is now open, click here to see what the fuss is all about!

Sherrards are thrilled to be working with Lovisa, a leading global jewellery and accessories brand with over 1000 stores across more than 45 countries. Known for delivering affordable, on-trend pieces, Lovisa continues to grow its international footprint—including further expansion in the UK retail market.

Partners Terry Fendt and Stephanie Kierans are advising Lovisa on a range of UK commercial property matters as part of this rollout. Their support has included lease negotiations, acquisitions, and ongoing legal advice to help secure prime high street and shopping centre locations. To date, Sherrards has assisted Lovisa in acquiring new outlets in key retail destinations including Colchester, York, and Castleford, with many further sites in the pipeline.

We’re delighted to support such a dynamic and fast-growing brand as they broaden their UK presence.

Click here to view your nearest Lovisa store.

Key Takeaways for Landlords and Tenants

Landlords	Tenants
Limited prime supply creates strong rent growth prospects	Hybrid working still dominates, but quality now trumps quantity
ESG compliance is no longer optional: retrofit planning is vital	Negotiating lease flexibility and break clauses is increasingly common
The investment market demanding Grade A space	Workplace experience is as important as location or rent

A Deeper Look…

 

Lettings on the Rise

The first half of 2025 has seen a rebound in office lets. In the Southeast, Lambert Smith Hampton report occupier take-up reached around 2 million sq ft by mid-year—roughly 9% above the long-term average. Cushman & Wakefield report that Central London, long considered a bellwether for the sector, recorded more than 2.1 million sq ft of take-up in the first quarter alone, slightly exceeding its ten-year norm.

Despite slower return-to-office rates in some sectors, many large employers are reaffirming their need for physical space (particularly Grade A), sustainable, and centrally located. Occupiers aren’t necessarily taking more space, but they are being more selective about where and what they take.

Scarcity of Supply

Improved demand has not been matched by supply. New office construction is at its lowest in a decade, with UK-wide development pipelines shrinking to just 23 million sq ft—down by 3 million sq ft year-on-year. According to Savills, the City’s vacancy rate has eased to 7.0%, its lowest since 2020, while vacancy in the West End has remained broadly stable.

Outside the capital, Lambert Smith Hampton note the imbalance is more pronounced. In the Southeast, only 10% of current office stock is considered “prime,” yet it accounts for nearly a quarter of all leasing activity. With limited speculative development, except in the innovation clusters of Oxford and Cambridge, landlords holding high-quality space are in a strong position.

Rents Trending Upwards

The supply/demand tension is driving rents higher, particularly for best-in-class assets. According to JLL, prime office space in central London is now achieving around £160 per sq ft, which is a 14% increase year-on-year. Regional centres aren’t far behind. Lambert Smith Hampton report that Reading has seen prime rents climb to £56 per sq ft (up 45% from previous peaks), and Basingstoke has also recorded double-digit growth.

Investment Still Cautious

Investor sentiment is cautiously optimistic. After a prolonged slowdown, capital is beginning to flow again – particularly into Central London. Cushman & Wakefield report office investment volumes rose to £2.56 billion in the first quarter of 2025, marking the strongest quarter since 2022. Elsewhere, regional volumes remain subdued, though activity is ticking up, with Southeast transactions hitting their highest quarterly count since late 2021.

Yields, however, are holding steady. In the City, Cushman & Wakefield report prime yields remain at 5.75%, while the West End is tighter at 4.00%.

With interest rates expected to ease in the second half of the year, some investors are already positioning themselves for a more active market in 2026.

Key Themes: ESG, Hybrid, and Regulation

Three forces are shaping the office sector: sustainability, flexible working, and regulatory reform.

1. ESG
   Occupiers are placing growing emphasis on energy efficiency and green credentials. By 2030, all commercial properties in England and Wales must meet at least EPC ‘B’ standard. Many existing offices, particularly older stock in regional centres, will require significant retrofitting to comply—creating risk for some landlords and opportunity for others.
2. The Changing Role of the Office
   The hybrid working revolution appears to be cooling. Major employers, especially in finance and law, are encouraging (and in some cases even mandating) a return to the office. However, flexibility remains the key. Occupiers want flexible layouts, excellent connectivity, and amenities that make the office experience worth returning for.
3. Policy Under Review
   The potential reform of upward-only rent reviews and wider commercial lease regulation could significantly alter how office leases are structured. While nothing has yet been confirmed, both landlords and tenants should watch this space closely in the months ahead.

Conclusion: Quality is Key

The UK office market is far from uniform. While older stock continues to struggle with weak demand and the rising risk of obsolescence, prime, well-located, ESG-compliant property is in high demand.

For landlords, there is an opportunity in upgrading assets to meet the rising demands of occupiers. For tenants, now is the time to review your space needs, align leasing strategy with ESG policies, and take advantage of favourable terms that are there for the taking.

 

If you would like to find out more, please get in touch with Christopher Piggott, or contact the Commercial Property team.

This provides the tenant with more commercial certainty as to the length of time they may occupy the premises and may be more acceptable to the parties than a lease for a longer term with a break clause.

There is, however, a scenario which landlords need to be careful to avoid.

The Perpetually Renewable Lease

For an option contained in a simple clause in a lease, it is usual to contain a sweeper statement that the new lease is, except where stated otherwise, “on the same covenants and provisos of this lease”.  Obviously, if that were interpreted to include the option to renew, you would have on paper a lease which was perpetually capable of renewal.

It is not possible to grant a lease which is renewable in perpetuity.  Under s145 and Schedule 15 of the Law of Property Act 1922, a lease which purports to be perpetually renewable is converted into a lease for a fixed term of two thousand years. 

As options to renew are usually found on relatively short-term leases, it is highly unlikely this would be contemplated by or to the benefit of the landlord.

Fortunately, given the unlikelihood that this was what the parties intended, “[a]s a matter of history, when a covenant by a lessor conferred a right to renewal of the lease, the new grant to contain the same or the like covenants and provisos as were contained in the lease, the courts refused to give literal effect to that language, which if taken literally would mean that the second lease would contain the same…option to renew…” (Russell LJ in Re Hopkins’s Lease; Caerphilly Concrete Products Ltd v Owen [1972] 1 All ER 248). 

However, where the parties have included language that clearly indicates the renewal lease is to include an option (e.g. an option for a new lease “on the same provisos and agreements as are herein contained including the option to renew such tenancy for a term at the end thereof”) then the courts will accept that this creates a perpetually renewable lease, which is converted into a 2,000 year term.

The Palo Alto case

In the 2018 case of Palo Alto Limited and others v Alnor Estates Limited, the landlord had, acting without legal representation, entered into what they believed to be a one year lease with an option to renew for a further year, drafted as a simple clause as follows: “The tenancy is granted for a period of one year with an option to renew at the end of the term”.

The tenant requested an amendment to this clause to “The tenancy is granted for a period of one year with an option to renew at the end of the term/or a further one year on the same provisos and agreements as are herein contained including the option to renew such tenancy for a term of one year at the end thereof.”

Believing that this simply granted the tenant the ability to extend twice up to a maximum of three years, the landlord agreed.

On completion, the tenant applied to the Land Registry for the registration of a 2000 year lease on the basis the lease granted was perpetually renewable.

The Land Tribunal decided (unsurprisingly) that the lease was indeed perpetually renewable, and that rectification for mutual mistake was not possible, as the tribunal found the tenant knew the consequences of their amendment.

However, the Land Tribunal did allow rectification on grounds of unilateral mistake.  They found that the tenant was aware of the mistake, that the mistake was in the tenant’s favour, and that the landlord was unaware of the mistake and hence it would be inequitable to refuse rectification of the tenancy on these grounds. 

The Landlord was in one sense fortunate; the tenant’s actions could not be plausibly explained other than in trying to wangle an advantage on a little-known point of law, and despite some rather technical arguments about whether unilateral mistake could apply the tribunal’s sympathy was clearly with the landlord.

On the other hand, in trying to save money by not being represented in the grant of a lease, the landlord had to incur the time and expense of two tribunal cases (there was an appeal to the Upper Tribunal on some points) in order to rectify something that, with professional advice, could easily have been avoided in the first place.

 

Whether you are a landlord or a tenant, it is critical to ensure that lease terms effect the commercial intentions of the parties, without opening the door to legal uncertainty or costly rectification proceedings.

If you have any questions or would like to learn more, please contact Jonathan Broad, Associate in our Commercial Property team.

Land banking — the practice of holding land with no immediate intention to develop it — has long been a contentious issue in the UK property sector. With growing public concern over housing shortages, urban sprawl, and stagnating infrastructure, the government has responded with sweeping reforms aimed at tackling land banking head-on. This blog explores key legal updates recently introduced and forthcoming, and their potential impact on commercial property developers and portfolio managers.

New and Upcoming Measures to Combat Land Banking

Community Infrastructure Levy (CIL) Reforms

The Community Infrastructure Levy (CIL) was originally introduced to ensure that new developments contribute to the cost of local infrastructure. Traditionally, CIL charges have been based on a fixed rate per square metre of new development. However, the system has faced criticism for its complexity, rigidity, and limited effectiveness in deterring land hoarding.

Recent shifts aim to make CIL more adaptable and locally responsive. Many local authorities now exercise discretion in setting differential rates based on the scale, type, and location of development. Some councils are also exploring the use of clawback-style mechanisms through planning obligations (e.g. Section 106 agreements), requiring additional payments if development milestones are not met within specified timelines. While these approaches are not formalised nationally, they reflect a growing local policy trend to discourage long-term landholding without active development.

Mandatory Infrastructure Levy

The proposed Mandatory Infrastructure Levy (IL) is set to replace much of the existing CIL and Section 106 systems. It is designed to address perceived loopholes that have allowed developers to negotiate down their obligations. Key features include:

• Charges based on Gross Development Value (GDV): Unlike CIL, which is calculated on floorspace, the IL is tied to the end value of development, directly linking infrastructure contributions to market success.
• Payments due at completion: Levy payments are typically deferred until development is complete, reducing the incentive to delay after gaining planning permission.
• Affordable housing incorporated: Affordable housing delivery will be managed through the levy, limiting developers’ ability to adjust obligations via viability assessments.

The Infrastructure Levy thus aims to make speculative landholding less attractive, promoting quicker and more reliable project delivery.

Planning System Reforms

The government’s wider planning reforms under the Levelling Up and Regeneration Act 2023 also seek to discourage land banking:

• Faster decision-making: Local authorities are being encouraged and resourced to expedite planning decisions, closing off administrative delays as a justification for holding land inactive.
• Enhanced compulsory purchase powers: Councils now have expanded powers to compulsorily acquire land that is not progressing, enabling them to bring stalled sites back into active use.
• Development progress monitoring: Developers may be required to report regularly on delivery progress. Although details are emerging, these reporting requirements are designed to increase transparency and accountability.

Together, these reforms are shifting the landscape to favour active development over passive landholding.

Penalties and Legal Actions

The enforcement regime is also tightening:

• Financial penalties may be imposed for non-compliance with agreed delivery schedules, particularly where obligations are secured via planning agreements.
• Planning permissions may be subject to review, and in cases of clear non-delivery without cause, local authorities may seek to modify or revoke them — although this requires formal process and justification.
• Local authority intervention: Councils may step in using new powers to acquire or facilitate development, although direct build-out by councils remains dependent on local capacity and funding.

These tools reflect a clear shift from the previously permissive approach to land inactivity.

Implications for Commercial Property Developers and Portfolio Managers

Increased Financial Risk

Holding undeveloped land for speculative purposes will carry more risk. The emerging Infrastructure Levy, potential clawbacks, and penalties increase long-term financial liabilities. Developers will need to factor these into early-stage planning and viability assessments.

Need for More Strategic Planning

To maintain land holdings without facing enforcement, developers must present credible, phased, and timely development strategies. Fast-track approvals, detailed delivery timelines, and clear end-use plans will become crucial to navigating this evolving landscape.

Portfolio managers may also need to reassess asset allocations — prioritising income-generating or actively developing sites over dormant land banks.

Opportunities for Agile Developers

Conversely, these reforms may create opportunities for nimble, delivery-focused developers. As passive landholders exit the market or are forced to sell, more development-ready sites could become available. Those who can quickly secure approvals, fund infrastructure, and build efficiently may thrive.

Moreover, improved infrastructure delivery via the levy could raise the quality and value of completed schemes, making commercial projects more attractive to investors and occupiers.

Conclusion

The government’s crackdown on land banking represents a fundamental shift in the UK property landscape. Through the introduction of the Infrastructure Levy, planning reforms, and enhanced enforcement powers, the legal framework now prioritises delivery over speculation.

For commercial property developers and portfolio managers, the message is clear: success will depend on speed, strategy, and the ability to deliver. Those who adapt early are best positioned to benefit from the changing rules of the game.

 

This article has been written by Trainee Solicitor, Mike Jenkins and has been fact checked by Chris Piggott, Senior Associate in Commercial Property. 

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.