Time for More Flexible Leases in a Hybrid Work Environment

As the COVID-19 pandemic finally seems to be easing off, at least for now, more and more people are beginning to return to the office after a long period of working mainly from home. But will everything be back to normal, or has there been a permanent shift in the way we use the office? Several recent studies show clear indications that people are likely to continue to work partially from home and partially from the office, i.e. working in a hybrid environment. Not only will this undoubtedly have an effect on the office lease market from a commercial perspective, but it will also affect the way lease agreements are negotiated.

Although so far there has not been a seismic shift in the prime office rents in most major Nordic cities, we are beginning to see indications of a downward trend. The actual office premises in many metropolitan areas are also appearing to be significantly higher than the official figures, often due to an oversupply of co-working spaces and excess space being available on the sublease market. Although this is not caused solely by the pandemic, it is likely that the trend has become more prominent and been accelerated by it.

Similarly, the pandemic has increased and accelerated the demand for flexible solutions when it comes to commercial leases. Requests for shorter lease terms or lease options are becoming increasingly common, as well as options to expand or decrease the leased area, or to alter the use of such an area. Tenants are seeking adaptable and multifunctional spaces that can cater for all their different needs. And landlords will be looking for alternative ways of using their premises. But is such flexibility supported by the legal framework and the ways in which lease agreements are traditionally being drafted?

Historically in the Nordic countries, residential leases and commercial leases stem from (or in Sweden’s case, remain within) the same legal framework. It was envisaged that the same properties that were relevant for a residential tenant, were also relevant for a commercial tenant. Hence, the focus of regulations has been the protection of the tenancy, in particular with regard to foreseeability, security of tenure, and fair pricing. The way lease agreements have traditionally been drafted is highly influenced by this framework.

However, the hybrid work environment has a higher focus on flexibility. Changing needs of the tenants, both regarding fluctuations in the occupancy and the use of premises, require an agile approach. Traditional lease laws and lease agreements are ill-equipped to deal with this. Flexibility regarding lease term, lease object, and purpose of the lease are the very foundations the relevant laws and agreements are set out to protect. This can make leases unnecessarily rigid for both parties in a fast-changing world.

At the other end of the spectrum, we have short-term co-working memberships or “space as a service” models. Although this can cater for a specific, usually short-term, need, it does not quite meet the standards of exclusivity, branding, and familiarity in location that many tenants are seeking from their premises.

So, perhaps a middle ground is needed, where we can merge the foreseeability and exclusivity of a traditional lease, but with the flexibility and adaptability required in the current work environment, i.e. a hybrid lease agreement. This can, however, only truly be achieved if the parties’ interests are aligned and both parties are incentivised by such flexibility. To this effect, the adversarial nature of lease laws and the transactional structure of traditional lease agreements inhibits the strive for a “win-win” situation. If both parties in negotiations focus on optimising the return at the expense of the other party, we will never have more than a zero-sum game. A shift away from this type of thinking can be seen when it comes to outsourcing and joint ventures. Here, the use of collaborative contracting and strategic partnerships have shifted focus from merely splitting the return to increasing the return. This mindset is probably required to allow for full flexibility in the case of lease agreements, but the originally well-intended legislation and tradition may inadvertently be in the way.

So, perhaps the time has come to reconsider the rigidity of our lease laws and to rethink the ways in which we negotiate lease agreements, in the light of our recent experience with a hybrid work environment.