Macro Moves

Effect of lockdown regulations on landlords and tenants

Created on 25 Apr 2020

Wraps up in 4 Min

Read by 1.3k people

Updated on 29 Aug 2020

The COVID Pandemic has created an unprecedented scenario that has ensnared the whole world in its grip. Lockdowns have been announced across the country to break the chain of the virus spread. People have been told to stay home to beat this virus but for some, the home may not even be an option anymore.

India's real estate, which has been performing well for the last few years despite a slowdown in the property market, is likely to be impacted due to nationwide lockdown. Amidst the grim situation, the businesses that have rented office spaces are feeling the heat to pay the rent and comply with other lease covenants. Though the Government has been quick in providing reassurance to businesses and workers alike, the continuity of business plans remains undetermined.

Many retailers have already started communicating their inability to pay commercial rentals to the developers. One can witness a  short-term effect on demand-supply of office and retail spaces, in addition to pressure on rental values. Corporates and retailers under the current scenario are expected to delay their decisions on fresh leasing of commercial spaces by at least a quarter.

The catastrophic impact

  1. Outstanding rental payouts - Nonfunctioning of businesses as well as the residential tenants are feeling the heat of payment of rents and leases. Many are being economically stretched in this scenario as they can’t afford to pay their rents.

  2. Limited income and unemployment fears currently loom large could result in deferred property purchase decisions in 2020 and ultimately derail the segments’ growth momentum.

Negotiating the commercial property rental agreements should be a major priority for landlords and tenants in the ensuing months as the impact of coronavirus is felt across the industry. How should affected tenants and landlords approach rent negotiations?

Here are some key points to consider.

1. Commercial Landlords And Tenants need to negotiate at the earliest

As the quarantine restrictions continue to bite, commercial properties have been out of business for an extended period. This loss of income-earning potentiality has driven the commercial tenants to financial challenges. Rental payments have been staggering as they incur such losses due to the lockdown on their business establishments. They need to speak to their landlords to reach an amicable solution to this crisis.

2. Not Paying Rent Is Not An Option

While many businesses will have little to no income during this period tenants should not approach negotiations with their landlord to remain in the property rent-free. This is because landlords still have fixed costs that they must meet. Just like the banks giving a moratorium period to its borrowers, the landlord should consider deferring the rental payments to a later date once the business has returned to normal. They can permit a partial or a complete rent waiver to the tenant. For instance, Mumbai-based realty player Lodha Group has announced its decision to waive off the rent for its retail partners post the announcement of the nationwide lockdown. 

3. Demonstrate Attempts To Remain Viable

Businesses have been forced to quickly adapt during the early months of the coronavirus pandemic, with many pivoting towards other revenue streams or adjusting their business model to stay afloat.

4. Aim To Maintain Tenancy

An occupied commercial property is the best outcome for both parties, as it means the tenant and their business are in the best position to survive the downturn, while for the landlord it means they’re generating some rental income. A vacant commercial property means the business and tenant have not survived, while for the landlord it will mean no rental income until the property is rented, and with vacancies likely to rise across most asset classes, finding a new tenant quickly may be challenging.

5. Companies eye rental savings after working from home

A more lingering impact on demand for commercial properties is if companies allow workers to continue to work from home even after the immediate crisis blows over. They may consider this as a long-term strategy, which will result in optimizing their real estate requirement and operations cost. Given the sluggish business environment and that is likely to be prevalent post the COVID-19 outbreak period, it will put rentals under tremendous pressure. 

Practical steps to be taken while entering into new contracts

The following points will be beneficial for the parties while entering into new contracts, especially in a case where the business is more likely to be affected by Coronavirus.

  • Carefully review obligations in the lease, construction contracts, and other real estate contracts

  • Insert a clause concerning an epidemic outbreak in new contracts

  • Retail tenants need to check their leases to understand what they are required to do in case they cannot operate their businesses from the premises.

  • Make sure to have business interruption insurance to cover the loss of income

  • If possible, insert provisions related to temporary adjustments in the rent

The Way Forward

In these crucial times, we need to take up measures that would help us in reviving our economy & all industry & business sectors. While the world is yet to know the outcome of the pandemic and how well the country would emerge from the current situation; taking care of your business and long-term interests is never a bad idea.

The sector is expecting staggered repayment of dues and seeks that all affected stakeholders will have to come together to firm up repayment plans for a mutually accepted solution. The government must support robust and effective measures to save the real estate industry.

An Article By -

Bernadine

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An MBA Finance graduate, having worked in the Telecom and Banking sector as a Risk and Compliance Manager. An avid blogger with a penchant for traveling

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