As we speak governments are meeting to discuss relief for tenants and we will be sure to update you as soon as these announcements are made.
As the world goes into lockdown and with the uncertainty that lies ahead, it is estimated that the economy has suffered a loss in excess of $2.7 trillion dollars resulting from the outbreak of coronavirus (Covid-19). It is vital that landlords consider having a contingency plan in place during these uncertain times.
What does this mean for Landlords?
Landlords need to be prepared for the uncertain, which includes issues with Tenants and their business, government directions resulting in forced closure of businesses or coronavirus contamination in the premises. The landlord should monitor the impacts that coronavirus is having on the tenant’s financial health and maintain transparent and honest communications about how these current affairs are impacting the tenant’s ability to meet its obligations under the lease.
Landlords need to be vigilant during these unprecedented times, as there are many potential issues that landlords will be experiencing. Over the coming months we expect to see an exasperated spike in tenants struggling to pay rent, tenants not exercising options to renew, tenants seeking to surrender leases, higher vacancy rates, tenants entering into liquidation, or prospective tenants protracting negotiations or withdrawing offers to lease. The coronavirus is starting to have a domino effect, which will have a significant impact on landlords, particularly the landlords whose tenants operate businesses in retail, tourism, events and hospitality industries.
Establishing a contingency plan
It is important that the Landlord takes reasonable steps to ensure the longevity of the tenant and its business. The first step is open and honest communication, along with mutual respect. This cannot be stressed enough. It is much better that the landlord is understanding and aware of its tenant’s situation, and that will allow time for the parties to discuss viable options that are available to meet each other’s needs. The landlord who maintains open communication with its tenant will always be in a better position, opposed to the landlord who is naive by leaving issues to manifest until it is too late.
If the tenant and its business begin to feel the effects of the coronavirus, there are several options which the landlord may want to consider:
- Rent abatement: by reducing the rent for a specific timeframe. It is important to establish how much the rent will be reduced by, how long it will be reduced, whether the reduction in rent is repayable, and if so when and how the repayments should be made.
- Rent free periods: a rent-free period needs to be clear on the duration of the rent-free period, when it is and whether it is repayable if there is breach of the lease later on.
- Rent deferrals: alike a rent-free period, however the rent is repayable. Again, the expectations of repayment need to be clear, as to when and how repayment is to be made, and whether any interest will be added.
- Variation of lease: this can be by way of reducing the rent and increasing the term of the lease; revising the rent review and resetting rent back in line with market value or reducing or waiving outgoings payable by the tenant.
Securing a new Tenant
To secure a Tenant and to ensure there is a quick turnover rate, it is now necessary for the landlord to be pragmatic and reasonable. With what we have seen so far, there will be fewer tenants looking to enter a lease or looking to renew their lease; and there will be other tenants who see this as an opportunity to secure a lease on favourable terms. It is important for landlords to weigh up their options and what incentives can be provided to ensure that a good opportunity is not lost, during this time of uncertainty.
There are a number of incentives that can be negotiated with the Tenant to make them feel more comfortable entering a lease. Expanding on the points mentioned above, additional incentives can also include:
- Contribution to fit out costs: the landlord could provide some financial assistance to the tenant to fit-out the premises, and the fit-out becomes the property of the landlord (if desired);
- Rent abatement: rent can be reduced over a specific time frame, if the tenant agrees to a longer term; and,
- Gross lease: where outgoings are included in rent, so the tenant knows exactly how much their annual expenses are to rent the property.
Preserving the Landlord/ Tenant relationship
Much like the proverbial ‘don’t bite the hand that feeds you’ this saying is particularly relevant from the perspective of both the landlord and the tenant. As a landlord, a good tenant is extremely important as they will take care of your property, pay rent on time and provide a steady income stream and seek to re-new their lease due to being well looked after. As a landlord, providing ‘corona compassion’ and taking measures to relieve some of the burden off a good tenant that is suffering could be a win-win. The main objective for a landlord should be the survival of both parties, not the survival of the fittest.
It is recommended that if a conversation is had with a tenant and changes are to be made that you have a formal agreement in place. If you need assistance with any of the above, please do not hesitate to get in touch with a lawyer in Coleman Greig’s Commercial Property team, who would be more than happy to assist you.