Ravi Chandran
Landlord-tenant dynamics may have been forever changed by regulations hastily introduced regulations to contain Covid-19
Hastily enacted regulations addressing a fast-unfolding pandemic have introduced a layer of complexity around leases between tenants and landlords.
Governments worldwide have implemented a range of emergency legal and fiscal policies to help cushion the economic damage caused by COVID-19 travel restrictions and stay-home measures. Each jurisdiction has established their own rules, resulting in myriad policies around returning to work, rent relief and codes of conduct for payment forbearance, and for helping tenants or property owners get access to government grants and loans.
“Many of these relate in some way to either direct fiscal support or regulatory suspension of the standard legal requirements around the tenant-landlord relationship,” says Jeremy Kelly, a director in JLL Global Research.
In Singapore, for instance, the government has granted tax rebates and cash grants for landlords whose SME tenants have seen their gross income between April and June fall more than 35 percent. In the UK, businesses in the retail, hospitality and leisure sectors are able to obtain a cash grant of up to £25,000 ($32,000) per property. In Australia, landlords get a 25 percent reduction in land tax liability for 2019-2020, provided this is passed on to tenants. Across the developed world, moratoriums on the forfeiture of commercial leases by landlords for non-payment of rent are also common.
Many of these measures are tenant-friendly. Given the current soft market conditions, tenants are arguably in a stronger negotiating position in many markets, says Kelly.
This had led to some concerns about the position of landlords. One of the issues raised by the various measures introduced to support companies through the crisis is that they have frequently involved direct financial support to tenants, or a prohibition on landlord enforcement mechanisms for collecting rent.
Landlord-tenant dynamics and risk of unintended impacts
Table of Contents
While some countries, such as Australia, the Netherlands and Singapore, have implemented plans to help landlords, in other regions the measures have not involved commensurate support for landlords, says Kelly. “A key distinction between countries thus far has been their acknowledgement, or not, that property is embedded in a larger economic and social system.”
In advanced economies, property developers and owners are not only a significant source of government tax revenue, but they are also investors in local infrastructure and services and providers of pension benefits and jobs. Unintended financial impacts on property owners, therefore, risk much more wide-ranging effects on local communities, companies and the broader economy, says Kelly.
Nevertheless, governments’ legislative efforts in mitigating COVID-led impacts have introduced uncertainty into lease relationships. Some landlords have opted to provide rental holidays for a fixed period. Others are looking to build in repayment schedules over the remainder of a lease, while some have forgiven lease obligations entirely, particularly for smaller tenants.
“These legal changes have necessitated negotiations on how rent obligations accrued during moratorium periods will be repaid,” says Kelly. The negotiations are dependent on the circumstances of each landlord and tenant, with landlords attempting to strike a balance between maintaining earnings and supporting tenants through the crisis period to sustain occupancy levels and income over the longer term, he said.
Landlord-tenant relationship in real estate as part of the broader economy
As many countries struggle to contain COVID-19, the scale and scope of the changes to leases are still unfolding. This uncertainty opens up questions about the structure of new leases going forward, he adds.
For instance, it has brought up the issue of turnover-based leases – where tenants typically pay a smaller minimum-guaranteed rent plus a proportion of their turnover, to more closely align retailer performance with rental levels – in the UK, where this type of lease has traditionally been rare.
Common law countries may also find difficulties building up case laws fast enough to deal with the crisis, says Kelly. However, in countries with robust legal and regulatory systems, the rights of tenants and property owners have historically been relatively well balanced, he notes. Over the decades, these countries have learned that when regulations are tilted too far in favour of tenant rights or landlord rights, the system does not work as well.
In situations where tenants can break leases without any redress to the property owner, it becomes much more difficult or impossible to use the income-earning property as collateral for a loan. Conversely, when property owners take advantage of, or help reinforce, monopoly powers conferred by supply constraints, then local tenants and local economies suffer, he explains.
In the short term, legal systems and landlord-tenant relationships are expected to be tested.
“Most real estate-related regulatory interventions were intended as emergency measures. While their impacts will be long-lasting, the process of reverting to previous standards and how this is managed will be important,” Kelly says.
Some countries have drawn up codes of conduct for commercial leases in recent months to help manage this relationship that are either mandatory, like in Australia, or voluntary, such as the UK. But understanding the balance of responsibilities and the importance of providing structured support to help both tenants and owners through this period – especially if the economic impacts of the pandemic are longer-lasting than initially expected – will be crucial, says Kelly.
While the short-term measures have highlighted issues to be addressed about the structure of leases post-COVID, any future contracts will need to remain well-balanced for both landlords and tenants to ensure a viable real estate sector, he adds.
