How Did COVID-19 Change the Lessor-Lessee Relations?

How Did COVID-19 Change the Lessor-Lessee Relations?

The COVID-19 pandemic and the introduced regulations to tackle it are paralyzing the global economy. Measures taken by governments around the world to curb the spread of the virus have led to a drastic drop in the economic activity. COVID-19 is more and more defined as the new reality that has created a number of restrictions that have set new standards in the market conditions among players in different sectors. The unpredictable development of the pandemic and its impact on the economy cause unprecedented uncertainty and complications in the contracts between tenants and owners of business premises. What are the consequences in the lessee-lessor relations considering this complex situation?

Law firms dealing with lessee-lessor agreements come up with opposing views over the issue what a force majeure circumstance is and what it is not, because each party to the contract stands behind a different statement. As the imposed emergency measures in relation to Covid-19, both in Bulgaria and around the world, are new and unusual in circumstances, a consistent case law has yet to be established to regulate trade relations in such situations. Lawyers also acknowledge that there are arguments in favour of  both sides. Each jurisdiction developes its own rules, which are related to a number of cases - opening offices and employees returning to their work places, reducing rents, revising the terms, postponing payments or developing of deferred payment schemes.

That is why the best approach in this situation, either when an issue or a case between a lessee and a lessor regarding office space arise, is to be resolved through negotiations between the two parties. It is important that they themselves reach an amendment to the relevant agreement by mutual agreement. All rental relationships have to be considered on a case-by-case basis, taking into account the relevant specifics and alternative options for carrying out the activity under the conditions of possible future restrictive measures. The difficult times and challenges facing business require a two-way, constructive communication between landlord and tenant. This communication should be focused not only on the current situation, but also on reaching consensus regarding future relationships in the event of unfavorable conditions.

The uncertain economic future necessitates the establishment of more flexible conditions in the lessee-lessor agreements. Fixed long terms have been replaced by short terms. There has been a tendency which shows revising the texts that regulate the clauses for terminating such type of relations and the obligation for two months' notice. More and more often, contracts also include the so-called "force majeure" clause, which allows the parties to be released from their contractual obligations and responsibilities in the event of serious unforeseen circumstances. This would be grounds for the parties, if they had invoked it, to be able to terminate their relations after the expiry of the period specified in the contract. It is possible that the measures introduced for managing the Covid crisis may be grounds for invoking force majeure, if they are those that impede the fulfillment of certain obligations.

COVID-19 is forcing more and more lessors to develop an individual plan to attract new lessees who require flexibility in contractual relations. Asked: "Can I rely on flexible terms?", instead of just replying "No", many owners answer with another question: "What does your business need?". Due to the real threat that their premises may remain vacant for an uncertain period of time, lessors are more open to dialogue and cooperation than before with their future lessees, who possess the need and opportunity to immediately occupy office space.

The new trend gaining speed is focusing on cooperation, which will be of a paramount importance in the world of business relations between tenant and landlord. The reality is that well-developed and well-considered agreements will allow all parties to move forward and engage with each other until new opportunities for development are explored. It will be extremely important to make balanced decisions that are possible and achievable only through negotiations and mutual understanding, and in each case the interests of both parties - landlord and tenant - will be explored and taken into account.

Those who are willing to commit to short-term contracts are expected to get the best deals and to be able to negotiate a more favorable lease in general. Recent forecasts suggest that this tenant-friendly mood will remain the new standard for some time, especially since issues on how office space will have to adapt to COVID-19 safety requirement have yet to be resolved.

It is a curious fact that in previous economic downturns there has been no need for a discussion about the future of office space  and whether they are necessary for a company. The consequences of the pandemic have imposed new concepts for the office space, which in turn must adapt to the challenges and requirements of both time and customers.

Studies of international housing markets show that most economic indicators decline sharply during health crises and then quickly bounce back once they are over. However, it is important to emphasize that those who do not take into account the new reality and who do not commit to the requirements it creates, run the risk of falling behind as entrepreneurs and suffering financial losses. The lessons learned from the current crisis will change both the terms of future leasing contracts and the very dynamics of the landlord-tenant partnership.

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