In Case of Emergency. What Are Your Options If It's Not Business a Usual?
We are in unprecedented times. COVID-19 has quickly become a worldwide crisis and is escalating in our own backyard. As tenant representatives, we are fielding calls from tenants of all sizes with regards to what their options may be if this pandemic is prolonged and affects a business’s ability to satisfy their lease obligations.
We are all nervous and the unknown of what the next number of weeks, or months, hold is something we are all trying to get ahead of. Many corporations, including us at Cresa, are running a multitude of revenue projections, analyzing expenditures and figuring out how to effectively work remotely until such time we do not have to – and as always, hoping for the best, but preparing for the worst.
For landlords, is this the tip of the iceberg in Alberta and what steps might they consider aiding in the potential survival of tenancies? And what options are available for tenants to mitigate costs?
Below are some considerations every tenant should contemplate going forward:
Although we all know there is no mechanism in commercial leases for official rent relief, landlords are business people too. Their goal is to maximize their return of a particular asset, but they also realize that without a certain level of occupancy their assets can suffer greatly. This is not a new concept in Alberta given what we’ve been through the last five years.
In our experience this approach requires tact, and more importantly, proof, that if a tenant is going to be forced into CCAA protection, or go bankrupt, that the rent component of the tenant’s spend is material enough in the equation to tilt the balance towards having a viable business. Generally speaking, if a tenant is going bankrupt regardless of their rent obligations this approach falls on deaf ears. But if rent is one of the most material spends for a tenant this approach is worth consideration.
If rent relief is not on the table, the next step is to engage with your landlord in a formal lease renegotiation. The caveat to this working for tenants is it’s a game of horse trading. A decrease of rental rates today, cash allowances, landlord’s work, rentable area reductions, and other incentives can be negotiated, but at what cost?
For this approach to be successful, tenants have to be willing to provide the landlord with additional term length beyond their current expiry date (i.e. blending current market rates with the contracted lease rate and deferring costs into the future). These processes go through a high level of scrutiny from landlords given there are near term decreases in their cash flow and many assets are owned by pension funds and REITs that have obligations to their shareholders and financers. With the right situation, and guidance, lease renegotiations are generally a tenant’s best shot at mitigating near term costs so long as they have a reasonable sightline on business.
This clause in a commercial contract is intended to cover off events beyond the control of a party (enter COVID-19). Force Majeure can potentially excuse a party from performing their contractual obligations in the event of serious unforeseen circumstance. In some leases, pandemics (or epidemics) are specifically referenced along with Acts of God, natural disasters, strikes, lockouts, etc. This requires legal input before being enacted, but it may be the lynch pin tenants are searching for.
There are many publications available for tenants thinking about effecting Force Majeure from almost all major law firms. Should you require more information on this please let us know and we would be happy to direct you to the available information.
Operating Cost Audit
Operating costs in a commercial lease cover off just about everything a landlord does to maintain and service a property. It includes such things as: electricity, security, janitorial, building maintenance, repairs, landlord employee costs, management fees, depreciation and amortization, landlord insurance, etc. It is impossible to say how long the COVID-19 situation will last, but if the current work from home trend continues it is feasible to expect that buildings should have some decreases in their operating costs. Tenant’s should expect landlords to take measures to decrease their operating costs and assist their tenants during these times.
That said, all tenants have the ability to dispute landlord operating cost statements (generally once a reconciliation is provided early in a calendar year), and some have the ability to formally audit operating costs. Either way, this is an avenue that must be carefully considered as an operating cost audit or dispute can be timely, and costly, given experts need to be engaged to essentially perform forensic audits on the landlord’s books. That said, in the right situation, this avenue may be one worth consideration for a mid to large sized tenant. There are specialists that perform these types of services on an hourly, or contingency basis.
Property Tax Assessments
As we know in Calgary all business and property taxes have been rolled into one tax from the City. Although this seems more straight forward for tenants (i.e. one payment per month) it also is vague as tenants are no longer being provided the specific breakdown of their tax bucket. Most landlords have been keeping a very close eye on property taxes, and where possible, appealing them. Some landlords have even gone to the extent of getting their buildings re-classified to a lower rating to mitigate the tax burden. This is not something tenants can specifically target, but asking the right questions to your landlord, or third-party operator, to ensure absolutely everything is being done to lower costs is something to consider.
Business Interruption Insurance
This type of insurance is often required in a commercial lease for tenants. It can also be covered off as extra expense insurance. It is a mechanism for companies to cover loss of profits in the event of a disaster. Does a pandemic classify as a disaster? Generally not, as the insurance is tailored to cover the costs of lost income and setting up a location in the event of a natural disaster to the existing facility. That said, tenants should reach out to their insurance providers to discuss their coverage and what options, if any, may exist to provide them with relief.
We are closely following grants for business owners both provincially and federally. The Federal government has announced assistance is coming, in the forms of billions of dollars, but how will this be rationed and who will be able to receive same?
We are in this together – our people, our businesses and our communities. As business owners, like you, we realize the importance of providing insightful information in order to help our clients and friends alike to find creative ways to mitigate near terms costs. Cresa has specialists Canada wide, and in Alberta in Calgary and Edmonton. We are here to discuss any of the above topics and provide guidance as required. We have all worked way too hard to see our businesses fail due to a virus. Let’s work together and help each other when we need it most – it’s what we owe each other to see this through.
Cresa is the world’s largest commercial real estate brokerage that exclusively works for tenants of space. This makes us unique in the world of real estate as our company was designed by tenants, for tenants, as we truly felt the traditional brokerage model was broken and inherently favored towards landlords. Cresa’s corporate mandate enables us to level the playing field in landlord/tenant relations in an industry riddled by conflict – and in the end protect and advance only the interests of our clients. Many of our competitors’ revenue streams are largely derived from revenue generated from landlord representation – conversely none of Cresa’s revenue is from landlord representation, which allows us to work for you, the tenants, with absolutely no built in bias.
Cresa’s model has been evolving since 1993 to correlate with the paradigm shift our industry, and more importantly, our clients, are going through. We unfortunately find ourselves in a situation that very few have faced in our lifetimes; we need to stand shoulder to shoulder in order to ensure our collective success in the coming decades. That is our pledge to you.
Feel free to reach out to any of our advisors, should you need guidance on any of the above concepts. Click here for a downloadable version.