Contracts’ renegotiations as a result of global pandemic

The coronavirus pandemic has caused a confusion in all sectors of the economy, including the commercial real estate market. In the beginning of restrictions, the situation appeared to be very dangerous, but thanks to solutions that were commonly developed, unfortunate consequence of crisis were avoided in most cases.

Corona crisis

The first wave of the pandemic and the so-called ‘lockdown’ have put some companies in a dramatic situation. Due to the prohibition on running retail and service points in case of some companies, and as well as due to the outflow of customers remaining at home, in case of others, many businesses had to face a serious question regarding their future operations and financial liquidity. Meanwhile, the fact is that one of the largest expenses in a company is usually the cost of renting an office, service point or restaurant premises.

The situation was slightly different in companies that were not forced to cut expenses, but were obliged to change their work system to remote one, or partially remote. In the case of many of them, despite the loosening of the prohibitions, the situation did not changed. Many employees work from home until now – being frightened of another wave of epidemics, or such a system in a the company turned out to be simply convenient. In those cases that changed the system to remote or hybrid work, it often turns out that the office rented so far has become too large, and thus – the expenditure on its lease is disproportionate to the needs.

Desire of changes

Due to the real financial problems caused by the pandemic and due to the reduced demand for office space, tenants began to renegotiate their office space lease agreements. In the case of companies affected by the effects of lockdown, the negotiations concerned and still mainly concern deferrals of fees or rent reductions. Landlords are also concerned about financial losses, especially those who offer commercial spaces. It is already known that many stores in shopping centers have withdrawn or intend to withdraw from the market, and in the face of the decisive growth of the e-commerce industry, this trend may continue. It is true that landlords are usually protected against a complete catastrophe by tenants’ bank guarantees or security deposits paid after signing the lease agreements, but this is a short-term protection. Landlords are more willing to negotiate contracts, according to the principle that it is better to communicate with the tenant and maintain them, than being deprived of the proceeds until another one appears, perhaps on worse terms.

Just in case

Contract negotiations aimed at a temporary reduction in rents do not only concern tenants who are truly affected by the crisis. Those who feel uncertain about the future of their business are also considered within this group. As a result of observing the situation on various markets, the declarations of governments of many countries to re-lockdown, and understanding problems of their contractors, they take steps to minimize the risk of their own problems in the future. Companies start with reducing their cost, while first of all focusing on reducing the rent of the office.

The new tenants are not indifferent to the market situation. They show reluctance to make long-term decisions. Before the outbreak of the pandemic, lease contracts were usually signed for five years. Currently, we can observe intensified negotiations regarding a significant shortening of this time within signing new contracts with tenants or extend their contracts for another period. There is also an increase in expectations regarding the flexibility of terms considering termination of contracts or the possibility of temporary rent reduction, which results from concerns about the proceeding of the situation on the global market and realizing the threat of freezing the economy due to unforeseen events, which no one even thought about a year ago.

Recent months have shown how large and dense network of dependencies we are all connected to, regardless of which side of the contract are we on and what kind of business we represent. Fortunately, this time period also exposed that there is a great will for cooperation and understanding between businesses, and that we are able to make concessions, which in the long run may turn out to be more beneficial for our own business than pursuing given goal at any cost.