Commercial Leasing and Post-COVID-19: Trends and Negotiations to Expect

Despite fluctuating economic cycles, stock market volatility or other events such as the World Trade Center collapse or SARS epidemic, real estate investment has always been considered a safe investment.

Then came the COVID-19 pandemic; a crisis that no one could have predicted. It hit society and business community as we knew it. While the restaurant industry is now at a standstill, mall parking lots are empty, and some retail giants are declaring bankruptcy or protecting themselves from creditors, e-commerce is on the rise and teleworking is becoming the new norm. What does this mean for the future of commercial tenants and landlords?

Impacts on the Real Estate Market: Two Schools of Thought

Is it realistic to believe that some degree of normality will be restored? Although it is difficult to precisely define the real impacts that this crisis will have on the real estate market, two schools of thought stand out.

The most optimistic believes that activity could take off again as soon as containment ends and that, given the new health standards of social distancing, the need for square feet will generate, more than ever, increased demand from those who own these investments.

The most conservative believes that what we are currently experiencing will become the new standard and that, in this period of economic slowdown, businesses will want to rationalize their commercial spaces and save on the significant costs they incur.

Is there a miracle recipe for updating your lease standard or negotiating a "pandemic" lease for your next commercial or office space site? The answer may come as a surprise, but in our opinion, the "triple net" lease is not dead, and the "force majeure clause" will not disappear overnight.

Points to Be Raised in Future Negotiations

So what can we do to optimize the situation? Here are some tenant-specific questions that landlords will need to answer.

• 1. How can we control the flow of people into and out of shared spaces, such as stairwells, elevator shafts, bathrooms and lobbies, in accordance with the new health standards? How to manage social distancing and access to the floors of the building?
• 2. Is the building equipped with an ultraviolet sterilizer or thermal imaging cameras? Can they be legally used freely?
• 3. What are the regulations for food court businesses?
• 4. If the performance of a business is directly related to the traffic in the shopping centre, what about the obligation to actively and continuously operate a business in times of a pandemic?
• 5.  Where does the liability of the landlord end and that of the tenant begin?
• 6. Can the landlord challenge the municipal assessment of the building or shopping centre in which the landlord operates?
• 7. What will happen, in terms of forecasting urban demographics, if everyone moves out of cities?
• 8. While the landlord must protect its tenants, it must not lose sight of its liability towards its tenants. Hence, will the disclaimer clause be sufficient?

These questions are just a few examples. Regardless of the form or extent of the economic recovery, the interests remain the same : the tenant wants to operate his or her business, sell his or her products and retain his or her clientele, while the landlord wants to preserve or increase the value of his or her building through the income generated by the property.

The impact of the post-crisis period will be very real. Negotiation and collaboration will be the key to profitable investments and solutions acceptable to all parties.

To find out which strategies should be favoured and to prepare yourself, right now, for the issues and negotiations to be expected in commercial leasing, sign up for our executive roundtable to discuss best practices and solutions with industry professionals.