What use is a ‘meanwhile use’ anyway?

We are predicting a polarisation in the commercial real estate market this year with mid-market assets expected to suffer most as these occupiers are likely to be the ones hit hardest by restrained consumer spending.  With environmental performance set to be top of everybody’s wish list for the next 12 months the best-in-class office and retail space will always be in demand. Investors and consumers will insist that the brands they deal with align with their environmental, social and governance objectives so we expect demand and rental levels for top notch space to remain stable.

However, with occupiers focused on premium space, finding the right tenant for underperforming premises, or obtaining planning to repurpose assets or getting a development out of the ground can take time – sometimes years!

During that time, you have an empty property with its associated costs: business rates, security, hoarding, increased insurance premiums and utilities, to name a few. Some commentators estimate the average cost of vacant premises being in the region of £128,000 per annum before taking loss of rent and increased insurance premiums into account. Landlords and developers are also going to have to work harder to get deals on these spaces across the line and will need to put their hands in their pockets by either undertaking works themselves to “white box” a space, so it’s effectively plug and play for an incoming tenant or offering longer rent-free periods and/or increased tenant incentives to encourage a tenant to take the property.

There is also a risk of squatters taking adverse possession of the premises or compulsory rental auction if the Levelling Up and Regeneration Bill 2022 ever makes its way back to Parliament and (among other criteria) the property has been vacant for 366 days out of the last two years. Both of these scenarios carry significant associated legal costs with resolving issues – see our recent example of dealing with “professional TikTok squatters” here.

Is there anything you can do to mitigate void costs while you look to repurpose your asset or find that elusive tenant?

If you are planning a comprehensive redevelopment, and the property isn’t in a conservation area, you could look at demolishing the property to remove it from the ratings list. However, with increased focus on embodied carbon in the built environment it’s not the most environmentally friendly option.

Time to consider a meanwhile use – this is a temporary/short-term arrangement put in place to allow an occupier to make use of the property until it can be brought back into full commercial use.

The arrangement is documented by way of a licence to occupy, terminable on notice or a short-term lease with a rolling break. You can look to charge a rent (market or less) or simply ask the occupier to cover rates, insurance and utilities. The benefits to an occupier are clear to see, they get to make use of the space for a fraction of the normal commercial cost.  Landlords will also benefit by saving on the void costs.

Examples of successful meanwhile uses are:

• Pop-up shops allowing occupiers to trial new concepts before committing to long term bricks and mortar locations.
• Community hubs as part of a landlord’s placemaking strategy.
• Charitable uses.
• Property guardianship.

With the current economic uncertainty and a likely increase in business failures and administrations in the first quarter of 2023 we expect there to be a greater need for active short-term management to mitigate void costs.   A ‘meanwhile use’ may be the answer.