Restructuring rental agreements: Tips and trends

Share this with your network

The office environment as we know it will change drastically for the foreseeable future. Having analysed the market, John Jack, CEO of Galetti Corporate Real Estate, offers the following tips on to restructure your rental agreements, and offers trends he foresees coming into play:

John Jack
John Jack
Five Trends:
  1. Corporates will increasingly use flexible workspace to service their office requirement.
  2. E-commerce will be a necessity for business going forward, if you are building a business now that can’t be run online, stop and relook this.
  3. Landlords will have to offer flexible lease terms much shorter than the standard 5 year lease contract. It will come at a premium for the tenant but it will be better than the liability of a long term contract.
  4. Banks will have to align with landlords factoring in far shorter lease terms and the requirement to fund the CAPEX portion of the relocation.
  5. Companies or regulation will enforce an employee distancing protocol which will require a larger office for a similar number of employees or the same office for less employees. Overflow will look to serviced flexible workspace providers to cater to the requirement.

“Going forward, we foresee employment contracts being renegotiated based on flexible terms and approximately 70-80% working from the office at select times, on select days”, says John Jack.

Tips to restructure your rental agreements:

Many lessons have been learned during these extraordinary times. One that stands out and makes news headlines regularly is that of restructuring rental agreements.

According to Dean Wright, Partner from Schindlers Attorneys and Notaries, the pandemic has made it near to impossible for parties to meet their obligations of their agreements, particularly those relating to the rental of properties.

Wright says that many landlords and tenants are now entering into negotiations to amend/supplement existing agreements. The most common of these are as follows:

  • Deposit utilisation agreements – “Here, the tenant agrees that their deposit held by the landlord can be used to cover any rent shortfalls for a certain period of time, and this deposit amount will be replenished by the tenant by a certain date”.
  • Rental reduction and Tenant income declaration – “Tenants are starting to approach landlords for a reduction in rental amounts, in turn, landlords are asking for income declarations, documents and proof of loss of income to allow meaningful negotiations surrounding this.”
  • Rental deferment agreement – “These types of agreements temporarily suspend the tenant’s obligation to pay the full rental amount for an agreed period of time, as well as dictate how these payments are to be caught up in the future”.
Dean Wright
Dean Wright

Specific clauses that are being discussed and rethought are the “force majeure” and dispute resolution clauses in agreements.

  • Force majeure and impossibility of performance – although there is some misconception around these types of clauses, generally they aim to ‘excuse’ a party’s non-performance in terms of an agreement, as a result of a circumstances that were not within the reasonable contemplation of the parties. Typically either the agreement will specifically include these types of clauses (however we are seeing that these are rarely worded to cater for the effects of COVID) or one would have to look to the common law where the defence of impossibility of performance is relied on. “It is important to note that COVID and its effects are undoubtedly now within the contemplation of contracting parties, as such, non-performance due to COVID will more than likely fall out of scope of these types of clauses in the future, and the parties will now have to specifically regulate their obligations that may be hampered due to COVID in their agreements”.
  • Dispute resolution clause – “With the uncertainty of how court-based litigation may be affected post COVID and lockdown, agreements that contain alternative dispute resolution mechanisms are being utilised more in the event of a dispute arising. It is important to check whether the dispute resolution clause makes provision for alternative dispute resolution mechanisms such as arbitration, adjudication or mediation. Given that these types of dispute resolution mechanisms are consent based, parties are still at liberty to agree to follow them despite not specifically being included in agreements, however it is suggested that an attorney be consulted to assist in the preparation of such agreement ”.

In terms of settling disputes, parties are carefully considering their position before embarking on the standard litigation process to resolve their disputes. “Many are opting for mediation (private and court-annexed) or arbitration. By following these avenues, disputes can be settled without compromising longstanding business relationships.”

Share this with your network