From the smallest of businesses to the largest retail chains, retaining office or commercial space and paying rent must be one of the main reasons of losing sleep these days. There have been attempts at negotiations with the MCCI, but so far, things are not resolved.
In this mayhem, and with end month rental April approaching when a second during lockdown becomes due, businesses are feeling it – either as landlord who has the fear of more defaults and requests for abatement or deferment, or as a tenant, who has probably not seen a client since the last rental payment in March 2020.
Government or bank support packages are all good and fine, but, are far from resolving problems which have difficult solutions. What to do going forward, especially with no visibility on what the COVID bill will contain and when the actual restrictions on offices and retail will be lifted?
Within this mess, we consider that negotiation is the best alternative. You can definitely expect courts to be full of litigation once the lockdown is over, and you do not want your landlord and tenant case to get stuck in the muck for long enough to create a financial position of no return for your own business, whether as landlord or tenant.
So how do we negotiate this?
Let’s consider 4 aspects of the landlord and tenant negotiations which may be considered pertinent to good negotiations.
1 – the Force majeure clause:
Everyone must have run to their lawyers to discuss their agreement and the relative power of each of the players under their agreements. The force majeure clause, of course depending on how it has been drafting into your agreement, is a tricky one, and at best, is not clear as to whether it is enough to be used to terminate a lease agreement, even without Government intervening in the debate through the COVID bill.
Let us illustrate using 2 examples:
- Firstly, we have very rarely if at all ever come across any force majeure clause which defines the inability of a tenant to pay rent to amount to force majeure. Of course, you will tell me that it creates an inability to get access to the property or allow consumers to come to the shop or office, for example, due to the lockdown. This leads to the second issue.
- Secondly, anyone using the force majeure clause requires to show causation. In short, that the pandemic has been the cause of you not getting access to your office space, or retail space etc. But my question would be – whether or not you are essential service, have you applied for a Work access permit which has not been granted? If not, then how are you planning to prove that the pandemic is responsible etc? Tricky..
2 – The tenant profile
So far, it seems all tenants have cleverly mustered associations and teams to defend their rights or negotiate in groups. Of course, each is not coming with the same risk factor in the negotiations, and therefore a generalized concept may not be in the best interest of the landlord.
As at today, we suggest that there are 4 categories of tenants:
- The living dead
- The Panadol
- The Anemic
- The Vitamin!
The Living Dead:
This business is already dead. The tenant already knows or should know that his business will not be getting out of this lockdown or pandemic alive, and the only thing he is waiting for to happen on May 4th or whenever the reopening is announced, is for access to get his stock or furniture out and disappear or otherwise negotiate a lenient demise with the landlord. This causes for a different type of negotiation.
This business has been scraping through for a while and already has cash problems in the past. This is the type of business who would prefer a full abatement of rent from landlords as it would otherwise go under. It is for the landlord to be analyzing risks of future revenue here.
If you are the landlord, you should be demanding 2 sets of financial documents from your tenants:
- Documents to clearly justify that you cannot pay the actual rent without it affecting your viability;
- A business plan addressing how you, the tenant, can trust in a business which wants to continue to occupy rental space and undertakes to pay rent on time and according to contract in future.
This business has been doing well prior to the lockdown. There is scope for recovery and growth and therefore this is a good potential tenant to keep on the longer term.
Strategies for negotiation may include landlords considering different options around the actual rental agreement including deferment, abatement with a new lease agreement for a longer term to catch up revenue later, conversion of rent into a loan etc. with support of lenders – an overall easier negotiation potential.
The Vitamin is obviously the Supermarket or food or pharmaceutical outlet which is allowed to stay open. They are the anchors, and perhaps negotiation may become giving them more space and potential. But they are calling the shots.
3 – the negotiations
Do consider having a negotiation terms agreement before you start so that anything not agreed cannot be used against you as landlord or tenant.
The global tendencies cover:
- Rent reduction – considerations to reduce rent now, in return for a change in the agreement to either revert to the landlord later, or extend duration of the contract;
- Rent deferment – free rent concessions to incentivize the tenant into new longer term agreements for example. Negotiations would include terms of reduction, repayment, new terms of agreement etc. generally. Landlords should consider clearly what other payments need to be continued – e.g. syndic etc.
- Converting rent into loans – this is a more complex proposition. Do bring your lender or banker to the table if you are to get into these arrangements, as otherwise, your risk profile change may trigger other clauses under your facilities agreements as a landlord.
4 – Consider the impact of bankruptcies
As a tenant, it may be a bad idea to admit that you cannot pay for your end of month rent, as this can trigger other terms of a possible rental agreement which would specify insolvency or inability to pay as reason for termination.
As a landlord, and if you have been lenient on past collection, do check with your legal advisors, what ranking you would have for collection or rental arrears if the tenant declares bankruptcy or voluntary administration like our ill-fated Air Mauritius. That changes the risk profiling of the landlord and tenant exchange.
However, similarly, tenants have the larger risk of operating whilst being in an inability to pay their debts, which can open the door to directors becoming personally liable to creditors etc. smaller businesses should be waryof such risk and properly assess their ability to continue operating as a business, whether or not there are Government incentives to keep employees or other payment supports from grants etc.
Many of these negotiations can be done in these last days of lockdown, and for some, should be completed before access to locations are allowed again. It seems, like many other segments of industry, landlords and tenants may need to work more hours now than when they can get back to the office or shops..!