All about commercial lease restructuring in Covid-19 times

Office rentals remained stable across the major office markets in India in Q2 2021.

Rahul Arora

Covid-19 and the consequent downturn forced many businesses to ask their employees to work from home. The prolonged closure of offices led companies to rethink their real-estate obligations such as rental overheads and maintenance. This situation overwhelmed landlords with requests from tenants for help. Many landlords were accommodating enough to retain their tenants and were open to looking at restructuring their leases.

The trend continues, with many commercial tenants opting to renegotiate their leases and capitalise on these opportunities before it’s too late. With times changing, lease-restructuring ideas are becoming more innovative, creating a win-win situation for landlords and tenants alike. Offers are not limited to rent reductions, deferments or early terminations, but encompass various portfolio functions like financial reviews, managing critical dates and more.

Restructuring options at their creative best

Developers have been creative in designing deals to retain tenants or attract new ones. Here are examples of strategic approaches to lease restructuring:

Rent abatement. The pandemic hit the pause button for the expansion plans of many companies, compelling them to renegotiate better terms with their landlords. However, most landlords don’t find it financially viable to reduce rent and they remain open to giving respite to tenants in different ways like a partial waiver of CAM (common area maintenance) charges. Simultaneously, landlords are offering a longer initial rent-free period to attract new tenants.

Rent deferment. This gives tenants breathing space as they will only have to pay this amount with or without accrued interest at an agreed point in the future.

Early termination. Despite tenants expecting landlords to negotiate or allow them to terminate their leases early, very few landlords agreed.

Blend and extend. In case of multiple leases with the same landlord, tenants have the option of blending rents, escalations and lock-ins to reach mutually beneficial terms for the cumulative portfolio.

Burning the security deposit. Adjust the security deposit paid at the start of the lease against the rent payable until the deposit amount with the landlord is reduced to a mutually acceptable level.

Rent escalation on warm-shell. A leading biotech company recently recognised that escalations are to be paid on warm shells and not fitted-out spaces because the value of the furniture and fixtures is depreciating in nature.

How lease restructuring helps

Landlords can boost their property value by retaining tenants for longer leases. Moreover, many landlords see more security in a long-term lease because it doesn’t require them to go through the arduous process of finding new tenants. While retaining tenants helps landlords avoid vacancies, tenants find relief in the current uncertainty while enjoying he continuity of their leases.

Restructuring leases provides more flexibility to both tenants and landlords who can align the terms with their future business plans. Both parties can ensure some degree of stability during uncertain times and fluctuating economic conditions.

In recent times, businesses have already benefited from this approach. We anticipate that commercial lease restructuring will continue to be an optimal real estate strategy.

The author is MD - Bengaluru, Head - Office Leasing Advisory, India at JLL