Here are 5 possible solutions for Tenants and Landlords to consider.

 South Africa's economy may shrink by between 2% and 4% this year as a direct result of Covid-19 according to the SA Reserve Bank.

 

In its latest Monetary Policy Review, the central bank said there was also limited scope for an economic rebound in 2021, with growth unlikely to exceed 1%.

 

The Reserve Bank projected that the 21-day shutdown, with possible further extensions, could result in a 2.6% contraction of GDP from the production side of the economy. It also projected approximately 1,600 businesses going insolvent in this period. 

 

These numbers are still uncertain and the eventual outcome depends greatly on how quickly the various sectors pick up activity after the lockdown period. It is therefore imperative that Landlords and Tenants engage now to ensure a successful and speedy continuation of business post-Covid-19.

 

Swindon has already begun negotiating and structuring contracts between Landlords and Tenants to aid in sustainability over this period and recovery post lockdown. Our success herewith is underpinned by both parties' need to reach a solution in a mutually beneficial manner.

 

 

With this in mind, here are our 5 proposed solutions:

 

 

1.  An early release from the rental agreement

  • This entails the early release and exit from the rental agreement and can usually be negotiated if there is a limited period remaining on the lease.
  • Advance prior notice, by the Tenant to the Landlord, is required and the Tenant needs to agree to exit the property prior to the cancellation date agreed to.
  • The Tenant isn't liable for the rent payable over the remaining term of the lease. This amounts to a substantial saving for the Tenant, and an equally substantial prejudice to the Landlord.
  • It is reasonable for a Landlord to charge a penalty fee / early cancellation fee under such circumstances to cover a portion of the vacancy period, agent fees and reinstatement costs.

 

2.  Rental holidays, with the arrears amortised over the remaining term

  • This is where the Tenant intends to continue occupying the property and is committed to paying the rental on the remaining period of the lease.
  • A rental holiday is where the Tenant does not need to pay rent, or pays a reduced rental, over a short period of time.
  • The difference between the rental due and the amount actually paid isn't waived. Instead, the difference accumulates over the holiday period, with the full amount payable at the end of the rental holiday period or payable/amortised over the remaining term of the lease or a portion of the lease term, depending on the length of the lease remaining.
  • It is reasonable for a Landlord to charge a restructure fee/lease fee under such circumstances. 

 

3. Waiver rental (for a short period) and continue with the lease thereafter

  • These are seldomly agreed to by the Landlord.
  • However, where such a request is supported by a restructured lease including an early renewal, an extension of the lease term, or taking up additional space - the additional benefit to the Landlord could support such a request.
  • When a Landlord concludes a new lease with a key Tenant, it is not unusual for a Landlord to offer an installation allowance or an initial rent-free period - especially where there is a long-term lease on the cards. Similarly, it is not unusual for a Landlord to offer long-standing tenants (> 5 years), a short rent-free period or other incentives to remain in the property on renewal - especially when all the rentals are up to date.
  • It is reasonable for a Landlord to charge a restructure fee/lease fee under such circumstances. 
  • If the Tenant's lease is close to renewal this would be an ideal time to negotiate a short rent-free period in exchange for a longer-term lease renewal.

 

4. Turnover clause

  • In exchange for beneficial terms offered to the Tenant, over a short period where the Tenant's turnover will be affected, the parties agree that the Landlord will receive the benefit of a turnover rental over a specific period going forward.
  • Turnover rental is a percentage of the Tenant's turnover, above a certain base amount. This additional rental only becomes payable when the base rental turnover amount is exceeded.
  • When the economic environment changes to the benefit of the Tenant, the Landlord enjoys a limited and shared upside with the Tenant, for a limited period.
  • It is reasonable for a Landlord to charge a restructure fee/lease fee under such circumstances.

 

5. Sale / Purchase of the property

  • A Landlord may wish to sell and liquidate its property investment during this time. The existing Tenant, who already has a vested interest in the building, is often the best person to purchase the property.
  • The Reserve bank recently dropped the interest rates by 1%, thereby ushering in an even lower interest rate environment for property investors.
  • Financial institutions are already offering tenants, who want to purchase their own properties, favourable lending terms (up to 90% LTV) and it makes sense for a Tenant to capitalise on such opportunities.
  • Swindon can professionally value the property and assist with the sale agreement and negotiating terms between the parties, at a much-discounted rate - to assist with a sale between the Landlord and Tenant.

 

 

Swindon Property assists Landlords and Tenants during these difficult and indefinite times.

 

Should you need any further information or require a formal quotation on representing your interests with your Landlord/Tenant, please contact us.

 

For assistance, please contact:

Leigh Maingard | Head of Property Management

T: +27 (82) 558 9971 | leigh@swindon.co.za

 

Leon Breytrenbach | Corporate Leasing & Advisory

T: +27 (84) 887 7112 | leon@swindon.co.za