Introduction

1.The COVID-19 pandemic has significantly disrupted the lives and routines of organisations and businesses globally as various governments continue to impose restrictive measures in their respective countries to curb the spread of the pandemic. Such restrictive measures include the imposition of travel bans as well as workplace closures and lockdowns. Over the past couple of months, we have been seeing attempts to negotiate provisions in leases to spell out what happens to rent payments and whether there can be an exit right when work places (i.e. leased premises) cannot be used due to workplace closures or lockdowns.

2. This article hopes to provide an insight on the negotiation of these issues (in this connection, we would be talking about negotiating a new lease for the future, with the hindsight of the current COVID-19 experiences we all have had), and a discussion on the factors that parties may consider in striking a balance between the commercial interests of both landlords and tenants – as a successful and happy negotiation outcome is typically achieved when the interests of both commercial parties are addressed, rather than when each party seeks to “win” absolutely all his preferred no-loss position. 

Possible considerations from the landlord’s perspective where a tenant seeks to insert provisions into the lease that provides for an exit right or rent abatement in the event that the tenant cannot “go to work” at the leased premises:

3. The extent the tenant’s business would be affected by an unforeseen supervening event, like a workplace closure or a country-wide lockdown that renders the leased space “not useable” legally, will depend on the nature of the tenant’s business and how their ability to pay rent is affected if the leased premises cannot be used. Landlords should also be mindful of the balance that has to be struck between giving tenants short-term reliefs to help tenants survive through an immediate crisis to be in a position to recover when things get better, and, when it becomes pointless to force the tenant to stay in a lease if its business is so badly affected that it is simply unable to recover to perform the lease and to continue to pay rent under it. 

(i) Rent Abatement/Reduction

It is pretty clear why tenants will want to negotiate rent abatement/reduction provisions into the lease for periods when there is work place closure or lockdowns – these are definitely helpful to tenants during periods when they cannot trade as it affects their ability to pay rent. However, for purposes of negotiations, some factors tenants must know that landlords will consider, if pressured for rent abatement/reduction provisions for situations of lockdowns or workplace closures are:

• How long can landlords sustainably help tenants share the “pain” with reliefs before it becomes untenable for the landlord such that it may become better to let the tenant go and find a replacement who can perform, rather than go on not collecting rent?
• Will the abatement during the workplace closure help tenants to stay afloat long enough to be able to recover with such help and all other help coming from the government, in order to pay rent again after such help? Or is the help futile because the situation is so bad for the tenant that there is no recovering from it?
• How easy it will be to find a replacement tenant who can perform the lease better, i.e. more able to pay the agreed rent?
• What are the likely mandatory measures that may be legislated which landlords will have to comply with anyway? – while it may be no skin off certain landlords’ nose to give in to some of these contractually, landlords will likely want it to be expressly agreed in the lease that any legislated mandatory abatement must count towards these contractual abatement landlords can agree to, so that there is no double counting of reliefs that landlords have to give.
• A typical tenant may have only one set of leased premises to pay rent for, while a landlord of multi-tenanted buildings will have potential contractual rent abatements for numerous tenants to contend with. Therefore, it is vital that parties factor in the negotiations how tenable it is for the landlord to grant huge rent abatements to all its tenants. The exercise will be about pain sharing and not about transferring all pain for as long as there is workplace closures, if we factor in tenability for the landlord in negotiations.

(ii) Exit Right

We have already started to see tenants asking for the right to prematurely terminate and exit leases if there are work place closures or country-wide lockdowns beyond a certain duration.

From the landlord’s perspective however, if all leases in their building are to be terminated in the event of a certain duration of lockdown or work place closure, the situation would simply be untenable for the landlord. Even now in the current COVID-19 situation in the world, we do not see governments rushing in to say that all tenants should be allowed to terminate and exit their leases due to widespread lockdowns and workplace closures all over the world.

On the contrary, many governments saw fit to suspend contractual termination rights for non-performance and put moratoriums in place instead to buy time to see if recovery is at all possible. A landlord is unlikely to find it feasible to readily agree to have provisions in all their leases that allow all their tenants to exit in these situations, so it may not be a successful negotiation stance to simply insist that this be the tenant’s negotiation position. If a landlord is to give an exit right on the ground that a tenant is prevented from being able to use its leased premises by lockdowns or work place closures:

• a landlord would likely only do so if the landlord can conclude that the tenant’s situation brought about by the lockdown duration has become so dire that it is almost impossible for the particular tenant to recover from and as such, it would be pointless to insist on the tenant continuing with the lease.
• the landlord will also have its own pain points – how long before a replacement tenant can be found if the landlord releases the current tenant with no compensation. 

4. Negotiations where the interests and concerns of the counter party are drawn in for mutual consideration is more likely to bring a happy outcome, than one that demands an outright full abatement for the duration of the lockdown or work place closure, or a no-compensation exit without consideration for the landlord’s constraints and viewpoints.

Possible considerations from the tenant’s perspective

5. So where are the possible meeting points that a tenant can consider in such negotiations that could be more palatable to the landlord?

6. A good starting perspective is to see the goal as one of co-sharing the “pain” (as opposed to putting the tenant in a no-loss position) and one that is about using contractual provisions to provide clarity on agreed consequences, agreed “force majeure” rights and obligations, and agreed trigger threshold for these rights and obligations, when such unforeseen and often mutually devastating occurrence like lockdowns and work place closures take place. An awareness that trigger threshold must be one that is workable for both parties will also help achieve a good negotiation outcome.

7. In this regard, the following are some possible considerations that the tenant may take into account:-

(i) Rent Abatement

It is of course great for the tenant if he is able to get full rent abatement for every day that its whole staff cannot return to use every corner of the leased premises as originally intended. However, a negotiation stance that takes that position is unlikely to readily yield agreement and deal closure.

Factors for a tenant to consider before proposing a trigger threshold:

• How will the impact on cash flow be, when a lockdown or work place closure is called, now that the world has had some experience of these to hazard an intelligent guesstimate? Is there a pain-sharing formula that will work for the landlord and is tenable for the tenant in their respective circumstances?
• For retailers, are there measures based on gross turnover at the leased premises that can help form the formula for computation of proportion of rent abatement that will work for both parties?
• Can government reliefs be taken into account when determining how much the landlord needs to also share the pain when business cannot operate at the leased premises?

(ii) Exit Right

Asking for a no-compensation exit means the tenant expects the landlord to absorb the risk of rental loss that will result when the lease terminates, pending a replacement tenant being found to pay the rent that has stopped.

Factors for a tenant to consider before proposing such a right:

• What factors would help the landlord understand that the tenant would be unable to recover and stay afloat, if lockdown/work place closure duration exceed a certain period – would it be a drop of x % of revenue from the business carried out at the leased premises? Termination rights tied to such benchmarks may be more acceptable than one tied to number of days of lockdown/work place closure.
• Is it feasible to discuss a “sharing” of the pain of rental loss and uncertainty of replacement of tenant, i.e. is it possible to offer some extent of compensation to the landlord for the right to exit?
• Is it feasible to tie an exit right to a successful signing of a replacement tenant, and possibly making good some or all of the rental shortfall if rents drop?  

Conclusion

8. As the world navigates a new norm with expectation that some things will have irrevocably changed even when the world eventually declares victory over COVID-19, the factors that facilitate a successful, mutually happy outcome in a negotiation remains the same: a negotiating stance that takes a no-loss position is hard to push through because in situations like pandemic-driven work place closures or lockdowns, both parties have constraints and face losses. Seeking to see the pain points of the other party and trying to address each other’s constraints when it tries to navigate out of the situation to recover, is a non-negotiable part of the process if we hope to see a mutually satisfying outcome in the negotiations for an exit right or a rent abatement/reduction right in our leases, going forward.