Case of commercial properties

values of properties. This would in turn affect appreciation of the total capital value of property portfolios owned by landlords, and ultimately lead to the denting of the entire portfolios’ profitability.

Financial institutions

Banks and finance houses cannot be expected to waive payment of principal. This is solely because impairment of capital value will not happen in a whiff. For this trying period, the best that banks can do would be to defer payment of principal. However, just as landlords may need to consider forfeiting their right to part of rental due, it would be in order for banks to consider helping landlords carry part of the burden of loss. This suggests a moratorium on payment of principal and interest.

There is an opportunity here for landlords to approach finance houses with a view to restructuring their loans. Finance houses may consider waving full or partial interest for the period that landlords have difficulty in servicing loans owing to COVID-19 complications. And where loans are not restructured, finance houses should lean toward amortising payment of unpaid principal.

My considered view though is, just as finance houses gladly partook in the ‘windfall’ brought about by the good old times prior to the virus, unflattering as it is, they should also be willing to share in the tribulation brought about by the virus. Perhaps property developers and landlords with massive clout might consider amending their loan agreements to factor in reasonable concessions in their favour in the event of force majeure (FM) events involving epidemics and pandemics in the future. Of course, while financiers may welcome this, it is more than likely that such a concession would come at a cost to the property owner.

Landlords, tenants and property practitioners

While the situation is quite fluid for landlords and tenants the bad news is that the status quo might continue for a prolonged period. Parties should appreciate that the flattening of the curve which would ordinarily inform the government’s decision to repeal lockdown is not synonymous with a humungous downturn in infections. All it means is that the spread of the virus should be curbed to ward off possibility of reaching a quantum that can overwhelm the system and render healthcare not only ineffective but also inefficient.

Having that in mind, there is always a possibility of a second wave of infections. Once again the government would have to contend with the overarching moral issue which would call for a delicate trade-off between saving lives and protecting the national economy. We don’t need to scratch our head to determine what our Government would decide. A directive on the second government mandated shutdown would be issued. Simply informed by the fact that while the national economy can be revived over time, a deliberate ‘genocidal’ activity cannot be reversed.

Left to its devices, the coronavirus can deal a heavy blow on the relationship between landlords and tenants. This would be readily discernible in cases where either one or both parties succumb to greed. If the business of tenants has been affected by the Government mandated shutdown, it would be absurd for landlords to act as if they are living in another planet, totally oblivious of what is happening on planet earth. It is the revenue derived from business operations that tenants use to meet their rental obligations. Where the source of such income is wholly or partially interrupted, it is incumbent upon landlords to recognise that and behave in a reasonable manner.

Landlords have to be alive to the situation on the ground and determine what they can do to alleviate the stress faced by tenants. A few options are available to them. They can choose to be considerate and propose a partial or full abatement of rental for a time, or they could decide to defer rental payments that are due. This would be important where the FM clause on the lease is silent on rental concessions in the event of epidemics or pandemics, or unambiguously spells out that no FM event would result in abatement of rental. Clearly, for tenants who were not in arrears prior to COVID-19 era, cessation of rental revenue as a consequence of the lockdown was not occasioned by their failure to manage their businesses properly. It is therefore important for the parties to meet as equals in a conducive environment to discuss this and find mutually acceptable solutions.

In the event that landlords defer rental payment, they should know that the rationale for this is to avoid causing undue hardship to tenants. Hence, it would be in order for them to consider amortising deferred rentals over a reasonable time frame, taking into account the date on which tenants resumed full scale business operations and when they started treading the route to recovery. It would not be helpful for such amortisation to kick-in when tenants are still struggling to steady their wobbly feet on the survival curve.

Tenants with a compromised covenant strength, whose profiles do not give them the clout to engage landlords meaningfully, probably because of occupying a small footage in a multi-tenanted property might find value in clubbing together with other similarly positioned tenants and approaching landlords as a solid unit. However, this is not recommended.

And it should be an absolute last resort. Purely because each tenant has a lease which governs its relationship with the landlord. That is a bilateral relationship, not a multilateral one. So, in the first instance, it would make sense for parties to push for one-on-one interventions. Creative and enterprising negotiation skills have to come to the fore, as opposed to the unacceptable winner takes all cowboy disposition. For this reason, a meaningful dialogue has to take place between landlords and tenants. This should not be postponed. It is one of those immediate just dos.

A few weeks ago, trending in the news was a story about one KFC franchisee in South Africa who had made it very clear to all his landlords that for the total period of the lockdown they would not be entitled to rental payment. Of course that attitude enraged the landlords who obviously considered the franchisee as a self-centred charlatan. Really and truly, they did not need to remind him that they too had monthly expenses to take care of.

Amongst these are servicing of mortgages, payment of various contractors for outsourced services, remuneration of property managers and internal staff. The view generated by some that businesses cannot be empathetic is absolute nonsense, purely because none of those businesses are running on auto-pilot. Behind all of them, there is a human face created with the noble quality of compassion.

Where one or both parties are represented by property practitioners, these professionals should appreciate that their role is to facilitate the fostering of good relations between landlords and tenants, not to frustrate dialogue and burn bridges. In any case their skills might be invoked for helping landlords in the one instance, and in a totally different setting, they might be engaged by tenants.

In all cases, a win-win solution is therefore desirable. Of course, each party would do well to sharpen their negotiation skills in readiness for their meeting. Good preparation would be important. It would be frustrating if any of the parties entered the negotiating arena without having bothered to check their qualification for any Government programmes instituted to usher relief.

Preparation should start with both parties assessing what they are entitled to. The landlords may have insurance cover for loss of rental, and they should check if it covers them in the event of epidemics and pandemics. If it does, they should put through a claim. On the other hand, the tenants may have an insurance policy covering business interruption.

If so, they too should assess what they are entitled to. In the event that both parties do not have such policies, this would be the opportune time to consider securing them. However, before appending their signature, they should have the policy thoroughly scrutinised by legal advisers with a penchant for detail. Even the fine print should be read. Insurance policies with a lot of unfavourable exclusions might not be very helpful.

It is essential for landlords and tenants to objectively assess all their line item costs, and strategise on what they can do to exert a downward pressure on their monetary burdens. This would among other things entail objective engagement of internal staff, some of the suppliers and entities to whom some business activities have been hived off to.

Landlords and tenants must recognise that if they were to rigidly hold to their selfish position, they could end up ruining great business relationships. This could well result in the unnecessary creation of vacancies that could have been avoided. The bottom line is that vacant properties are not always worth the brick and mortar ploughed into them. And most certainly they are an irritating pain to landlords.

All parties would do well to take to heart the words attributed to Adam Smith, a Scottish economist and philosopher of the 18th century. In a paper entitled, “The Theory of Moral Sentiments, the ‘Father of Modern Economics” as he was affectionately called, penned the following words: “And hence it is, that to feel much for others and little for ourselves, that to restrain our selfishness and to indulge our benevolent affections, constitute the perfection of human nature..……… Upon many occasions, to act with the most propriety, requires no more than that common and ordinary degree of sensibility or self-command which the most worthless of mankind are possest of, and sometimes even that degree is not necessary.” Of course where our decisions have financial implications, it would be in order for us to tread the path of balancing our interests with those of parties with whom we are enjoying a mutually beneficial relationship.

Conclusion

All key players in the commercial property space have been considered. All of them are important. A certain level of humanity and reasonableness is expected of them. One property professional put it so poignantly when he said, all the key parties should have the attitude of, “Let’s share in the pain.” Most certainly, ‘your pain is my pain’ mentality would assist in finding mutually acceptable solutions in this time of extreme distress. So every key player has to chip in with a view to easing off the pain.