A key issue for multi-national owners and occupiers of real estate at any time is the differing legal and market position between jurisdictions. At no time has this been more pronounced than during and after COVID-19 related disruption.
However, much of what happens in the market is governed by commercial decisions rather than specific measures prescribed by legislation. As European countries emerge from COVID-19 lockdown, we have identified some practical negotiation and drafting strategies for property owners and occupiers.
In more detail
- Tenants should consider the required repayment of any unpaid back rent and, if necessary, liaise with landlords to agree repayment arrangements. Where not already sought, tenants may consider approaching landlords for temporary rent concessions to mitigate the return to full rental payments. Any such arrangements should be documented properly in writing. Concessions might include an interest-free rent suspension (more common in some jurisdictions), a percentage rent reduction or an alternative payment schedule. Landlords may reserve their right to claim payments from any deposit account or guarantors. Landlords may need to consider that it is likely to become more difficult to find a reliable tenant in the coming months.
- Government-implemented health and safety restrictions such as social distancing may necessitate physical alterations to premises, and/or the change of use of certain designated areas (such as canteens). Parties should (where relevant) check their lease provisions relating to alterations and use, and apply for and obtain any requisite consents (such as landlord, lender or planning) before carrying out any works or alternate use.
- Social distancing requirements will need to be addressed in common parts of multi-let premises (for example, lobby and lift spacing, reviewing fire evacuation procedures, and limiting ‘touch points'). Social distancing within premises will also be required to comply with government requirements.
- Landowners, landlords and tenants may find their property requirements have changed as a result of COVID-19, for example through redevelopment potential or altered space requirements. Parties should check lease terms (where relevant) to assess any upcoming lease expiry, rent review and/or break dates and any keep open obligations and consider appropriate actions. Landowners may, for example, consider sale and leaseback transactions as a cash-flow generator, or look at redevelopment or alternative use planning applications to address changing market trends.
- In new lease negotiations, the parties may wish to consider a detailed review of the insurance provisions, to assess whether a rent suspension may apply where the property is rendered inaccessible by insured risks including pandemic or outbreak of infectious disease, or indeed a general force majeure clause to similar effect. Landlords may come under increased pressure to accept such clauses. However, they are only likely to be acceptable where they can be backed up with a robust loss of rent insurance policy that would be triggered in such circumstances.
- Service charges in new leases may also come under increased scrutiny. Tenants may start to routinely seek service charge caps, to guard against increased costs arising from protective measures such as a more frequent and thorough cleaning schedule, more regular rubbish collection, the provision of perspex screens and hand sanitiser facilities. Conversely, landlords may seek to draft service charge provisions in more general terms, enabling them to recover any costs incurred in the interests of good estate management.
- Finally, turnover rents may become increasingly popular in retail and leisure premises, in the spirit of collaboration and risk-sharing between landlord and tenant. A turnover rent allows both parties to share in the upside when a tenant's business is prospering, but protects a tenant when times are hard. Careful drafting is key to a successful turnover rent provision that protect both parties. It can be helpful to include mutual break rights in a turnover lease, restrictions on assignment of the lease, key performance indicators for the tenant, and a base rent (subject to indexation). These give the landlord greater certainty that its tenant will be working hard to achieve the best rent for the premises, and the reassurance that the rent will not fall below a certain level.
It is worth bearing in mind that any government intervention measures will not last forever, and the 'new normal' will require landlords and tenants to adapt and collaborate in new ways to aid recovery and resurgence within the commercial property market.
In our Global COVID-19 Real Estate Guide, Baker McKenzie lawyers from 39 jurisdictions address some common questions that landlords and tenants are considering in these unprecedented and uncertain times.
Our recent webinar on the impact of COVID-19 on EMEA retail real estate (in collaboration with Harper Dennis Hobbs) contains a detailed discussion of the impact of government stimulus and policy response in five European jurisdictions. A recording is available here.