5 minute read 18 Feb 2022
Employees at modern office

Why employers need to plan ahead for changed real estate requirements

By Mairead Finlay

Associate Partner, Head of Real Estate, EY Law Ireland

Passionate about work. Family driven. Loves public speaking. Keen on sharing knowledge.

5 minute read 18 Feb 2022

Early engagement with landlords is vitally important for organisations contemplating a shift to hybrid or more flexible working arrangements.

In brief:
  • With restrictions lifting organisations are beginning to plan for a return to the office but with reduced space requirements in many cases.
  • Organisations will need to examine their existing leases to explore the options open to them when negotiating with landlords.
  • Landlords will need to look at their current offerings to ensure they meet the changing needs of the market.

The almost overnight shift to mass remote working at the outset of the COVID-19 pandemic has had a profound impact on the commercial office property markets. But what impact will this have in the months and years to come?

The constantly changing trajectory of the pandemic has consistently presented challenges to governments and businesses around the world. Despite this uncertainty organisations still need to plan ahead based on the information available to them. While restrictions may have been lifted in Ireland and many are in the process of transitioning back to hybrid or full in-office working models, an element of uncertainty is likely to prevail for a period to come.

After all, the ability of the COVID-19 virus to mutate in unexpected ways and become more infectious in the process has led to several reversals over the past two years. Organisations will therefore need to plan with at least one eye on a potential return to a remote working model at short notice.

And those plans will need to be informed by experience of remote working, which has by no means been uniformly positive.

In some cases, it worked extremely well while for others it has been a period of crisis management. Somewhere in the middle are the great majority of organisations who have made it work for them after ironing out the teething problems.

In January, we also saw the publication by the Tánaiste and Minister for Enterprise, Trade and Employment Leo Varadkar TD, of details of a new law which will give employees the right to request remote working. This is likely to spur interest in more permanent remote working arrangements among some of the labour force, where their role can be effectively done from home or another non-office-based location.

For many organisations, a return to the office, in full or in part, is essential. And not just as a means of optimising operations, but because there will be a clamour from at least some of their employees to do so. While models will vary across organisations, the landscape is going to change. That is why businesses need to start planning their future workforce models now.

It is clear that in the majority of cases that will involve some sort of hybrid solution. That could see whole departments continue to work remotely either from home or from hubs provided by the employer. Other employees might work remotely two or three days a week and others still may work full-time in the office either by choice or through necessity.

Having worked out the optimal arrangement for the organisation, the next step is to establish what that means for office space. Some organisations have decided to utilise unused desk space for increased meeting room and collaboration accommodation, thereby minimising the overall impact on space requirements. Others are looking for overall space reductions and consequent cost reductions. But that is easier said than done.

Organisations first have to establish what they have in their current property portfolio and whether this is capable of rationalisation. For example, if some properties are owned can one or more be sold or leased to a tenant with the others being used to accommodate the changed needs of the workforce?

Leased properties present their own challenges. Most leases have a clause preventing assignments, sub-lets or transfer to another party but consent cannot unreasonably be withheld. However, defining “reasonable” can be a costly process which ultimately ends up in the courts. There may be a break clause that can be activated but that will usually be dependent on the tenant having kept to the terms of the lease and that may not always be the case as a result of the pandemic.

Indeed, the situation is made more complicated by the fact that many landlords came to arrangements with tenants during the pandemic to either defer or temporarily reduce rents. Those arrangements will likely now be coming to an end if it hasn’t already happened.

There is still a sense that current arrangements need to be looked at by landlords and tenants and altered, if required, to reflect the changing landscape in which the offices now operate as a result of the pandemic. One example might be where the landlord comes to an agreement where a tenant pays a higher rent per square metre for a reduced footprint over a longer lease.

That would certainly suit the landlord where the tenant organisation has strong growth prospects. They may soon be looking for additional space and where better to look than a landlord who has already proven to be co-operative?

Where a tenant requires alterations to an existing space, it should be proactive in obtaining any prior consent from the landlord (which is usually required under their lease) as soon as possible. Tenants may look for different services to be offered/provided by landlords in leases, e.g. inclusion of a wellness space and provision of more sustainable services.

Landlords should look to differentiate themselves in this regard and it is in everyone’s interest to have sustainable leases. When it comes to what the office will look like as a result of the pandemic, tenants will be driven by the change in employees’ attitudes since the start of the pandemic. Employees want a working environment which emphasises their ability to grow professionally and foster professional creativity and innovation but also safeguards their personal safety and prosperity. There appears to be a shift towards a work-life balance and a more sustainable office, and the office space will have to cater for this shift so organisations can retain and attract talent.

The sooner these conversations start in an organisation the better. The earlier engagement begins, the higher the chances are of coming to an arrangement that suits all parties.

We may not be able to predict the overall impact of changed working models on the office property market, but individual organisations should be able to decide now what their future office needs are likely to be. The organisations that make plans now for their changed office property requirements will be the ones which benefit most from any cost reductions and other advantages offered by a shift to a hybrid working model. 

Organisations should consider their plans for the future, their current commercial property portfolio and assess what rights and obligations they have under their leases. Doing this allows organisations to make decisions as well as determine the relative strength and weakness of their negotiating position, if changes are needed to their commercial property needs. In this environment landlords and tenants should communicate with one another and work collaboratively for the benefit of both parties.

Summary

The enforced and largely successful widespread shift to remote working was achieved in circumstances where the parties had little choice but to adapt to the changed reality. That no longer holds true and the return to the office and the introduction of new hybrid models of working will require careful and often complicated negotiations between landlords and tenants. Organisations need to start planning now for those negotiations if they want to get the best result for themselves and their employees.

About this article

By Mairead Finlay

Associate Partner, Head of Real Estate, EY Law Ireland

Passionate about work. Family driven. Loves public speaking. Keen on sharing knowledge.