To address rental obligations during COVID-19
In order to curb the spread of the novel coronavirus, the Government of Bangladesh issued country-wide instructions for all non-essential businesses/services to remain closed from 25 March, 2020. This shutdown, although for the greater good, is adversely affecting everyone economically, especially businesses, as they grapple to meet their establishment expenses. Since the beginning of April, a pressing concern for businesses has been to meet their lease obligations, which is a significant expense, during this period of complete stagnation. It is highly likely that many tenants may not be able to pay their rent in the coming months. Therefore, this article aims to discuss the impact of COVID-19 pandemic on lease relationships, both commercial and residential, between landlords and tenants and the need to adapt existing contracts to the current realities.
It is to be noted here that, under lease contracts, tenants do not enjoy the right to reduce or default on their rent due to decrease in their income, government-imposed prohibition on carrying out everyday operations or even unemployment. In case of tenants defaulting on their rent obligation, landlords are entitled to terminate the lease for breach, in accordance with the terms of the contract.
All tenants may not be able to bounce back financially, straightaway once the restrictions are lifted to meet their rental obligations. For such tenants, the discussion with their landlords would pivot on terminating the lease, considering how to vacate and hand back the property to the landlord (in the midst of current Governmental restrictions on movement), and negotiating the payment of unpaid and due/owed rent. Here, it is imperative for businesses to evaluate COVID-19's impact on their business in order to determine their ability to pay rent and comply with lease obligations, and consider more reasonable alternatives, such as shared rentals or co-working spaces.
For other businesses/tenants, who are temporarily closed or who lack the necessary cash flow to meet their rent payment obligations in the immediate future, but are capable of returning to regular cash flows once the crunch subsides, may consider requesting their landlords for a lease adjustment. As stated above, landlords are not bound to agree to such lease adjustment requests and may respond to such requests by either starting lease enforcement actions or declaring the tenant to be in breach of their contractual obligations. However, it is also important for landlords to appreciate that this is an unprecedented and extraordinary situation that we are currently facing. Landlords should work with their tenants to find a solution to this temporary crisis since the landlords' interests are intertwined with the survival of their tenants. The status of commercial and residential rental market post-COVID-19 appears bleak, therefore retaining tenants through the crisis by factoring certain short-term adjustments to lease contracts may actually benefit landlords in the long term with regard to occupancy of their properties once the crisis subsides.
Therefore, at this early stage of the pandemic, landlords, on receiving requests for an adjustment of rent and willing to work-out solutions, should consider holding discussions with them focusing on the issues that are crucial in the short-term such as,
- Rent Relief: The first point of discussion should be around the relief the landlord is to provide the tenant to ease their struggle. The landlord may: (a) decide to defer rent payment completely for a certain period of time, (b) reduce rent by an agreed margin depending on the rent payment capacity of the tenant, or (c) forgo/abate the rent partially/completely for a limited period. Any rent not reduced, deferred or abated remains a payment obligation of the tenant.
- Rent Repayment: It is to be noted here that a deferral or reduction of the rent is not a waiver of the unpaid rent, as opposed to abatement of the rent. Any rent deferred or reduced will have to be repaid to the landlord and for this purpose, a repayment schedule should be drawn up by the parties, detailing when the repayment will commence, the total rent to be paid including the balance of the deferred/reduced rent, etc.
- Tenant Assurances and Reporting: If the landlord agrees to lease adjustment, either through deferral or reduction, the tenant will be expected to provide certain assurances to the landlord which depict the tenant's ability to repay the deferred/reduced rent in the future. In addition, the tenant may be required to periodically report to the landlord on its financial condition, status of operation and receipt of any financial assistance from the government, including loans. The landlord may also require guarantees from affiliate or third-parties as additional security under the repayment schedule.
All parties should try to keep the negotiations cooperative, considering the high stress situation. Any decision reached between the parties should be reduced to writing and consented to by all parties in order to avoid any future dispute. In addition to the points noted above, in order to protect their interests, landlords may provide for automatic termination of the rent deferral/reduction/abatement agreement, on bankruptcy or insolvency of the tenant and termination of the initial lease agreement by either party.
In order for the economy to rebound quickly, it is crucial that businesses are able to sustain through the crisis. Therefore, it is vital to provide protective measures for businesses to stay afloat, as is the intention of the stimulus packages being implemented by the Government. In addition to the lending facilities made available under these packages, the Government may also consider introducing a tenant protection scheme, which would prohibit landlords from evicting tenants unable to meet their rent payment obligations due to circumstances surrounding COVID-19 for a certain period of time or temporary expiry and suspension of lease obligations for the period of the government mandated shutdown. This would act as an added cushion, especially for SMEs, and compel landlords to negotiate with their tenants in good faith to reach an agreement for adjusting the rent during these unprecedented times.
The writer is an Associate at The Legal Circle.