Contact Us July 15, 2020
Retail and hospitality sectors continue to be the most directly hit, reflecting reduced consumer spending and dwindling profits. Before the Covid outbreak, until 2019, there was drop in move-outs by businesses in retail leasing in the US, and landlords were also focusing on adding services and experience to shopping centres. Service retailers for the first time overtook retailers selling products and restaurants, as counts grew by 30.9 percent from 2002 to 2017, as per JLL report. Post Covid outbreak, most tenants are looking for some way to cope with the financial burden and loss of income. In such a scenario, revaluating your leasing agreements is important to control your operating costs. Real estate leases form a major part of your operating costs and involves many risks.
Lease agreement clauses can make or break your finances, especially during tough times. Several provisions will need to be changed and added, to account for the possibility of a pandemic and the mandated shutting of businesses. This includes adjustments to force majeure and insurance provisions as well as use of common areas, caps on the usage, alterations, rules and regulations, all of which should be adjusted to reflect the new market. Some of the smaller details can either make up for a higher base rent than you wanted, or you can use them as tools to lower that base rent. As in all leasing agreements, the devil is in the details. Hence it is vital to understand and negotiate the terms. The key parameters that will influence the retail leasing sector in the post-Covid era are discussed below.
Deciding the Must-Haves and the Nice-to-Haves
For instance, you probably want to be able to sublease should things go uncertain (particularly if you’re brand new), but you may be able to forego free parking. Those nice-to-haves will end up being your negotiating chips. A sublease clause is good to have added, either in addition to or instead of lower termination fees. Should you need to switch your location, subleasing will allow you to recoup losses. Hence deciding the parameters that are essential and that are value added and choosing the right blend of both is imperative in today’s scenario.
Negotiating with Expert Guidance
Before jumping in headfirst, you may wish to get an agent or a lawyer to negotiate your lease for you if it’s within your budget. Agents, after all, are experts. They’ll be able to get your deals and clauses that you may never have noticed. Most often in commercial retail leasing, force majeure provisions only come into play in the initial build-out of the leased premises, or with respect to a casualty. The mandatory governmental closures due to the Covid pandemic brought a different aspect of what is or should be considered a force majeure event.
Thus, in the context of re-examining and potentially re-defining “force majeure”, especially considering mandatory governmental closures for many businesses in the retail sector, it begs the question: should there be an automatic rental abatement under these circumstances? Seeking expert guidance for these areas will save you a lot of time and become a life saver for ensuring business continuity.
Shoppers Preference and Shopping Centre Dynamics
It is inevitable that there will be retained fears around social gatherings, crowds and social interaction among others, after months of isolation and crave engagements. Logistical challenges could fuel a significant increase in demand for locally sourced products, a step back from the big chains. It goes without saying that a greater degree of touch-less amenities in retail spaces will become the norm with hygiene becoming overtly central. Re-planning will have a central part to play in the re-allocation of space within malls and centres, we will see a significant increase in temporary pop-up providers to service our swiftly bored demographic with their ever-shifting fancies and expectations.
Conclusion
Going forward, landlords will strongly consider the impact of another (or different) wave of mandatory governmental closures and what flexibility they have when permitting certain limited operations for their tenants when negotiating future retail leases. These modifications will likely put landlords in a better position to respond and react to the new normal that will exist until a vaccine is developed and widely distributed, says Dan Villalpando, a partner at Cox, Castle & Nicholson. These tough times enables to relook at the way business was handled before and to factor in the right provisions to handle contingency situations to sustain your business.