How lease restructuring will benefit your business during uncertainties?

Covid-19 and the consequent downturn forced many businesses to ask their employees to work from home. The prolonged closure of offices led companies to rethink their real estate obligations, such as rental overheads and maintenance. This situation overwhelmed landlords with requests from tenants for help. Many landlords were accommodating to retain their existing tenants and were open to look at restructuring existing leases.

The trend continues, with many commercial tenants opting to renegotiate their existing leases and capitalise on these opportunities before it’s too late. With times changing, lease restructuring ideas are becoming more innovative, creating a win-win situation for landlords and tenants alike. Offers are not limited to rent reductions, deferments, or early terminations but encompass various portfolio functions, like financial reviews, managing critical dates and much more.

Developers have been creative in designing deals to retain existing tenants or attract new ones, Below are a few examples of strategic approaches to lease restructures.

Rent abatement. The pandemic hit the pause button for many companies’ expansion plans, compelling them to renegotiate better terms with their landlords. However, most landlords don’t find it financially viable to reduce the rent for existing tenants, they remain open to giving respite to tenants in different ways, like partial CAM waiver. Simultaneously, landlords are also offering a longer initial rent-free period to attract new tenants.

Rent deferment. This gives tenants breathing space as they will only have to pay back this amount with or without accrued interest at an agreed point in time in the future.

Early termination. We also noticed that despite tenants expecting landlords to negotiate or allow them to terminate their leases early, very few landlords agree to this.

Blend and extend. In case of multiple leases with the same landlord, tenants have the option of blending rents, escalations, lock-in etc to arrive at mutually beneficial terms for the cumulative portfolio

Burning the security deposit. Adjust security deposit paid at the commencement of the lease against rent payable till deposit remaining with the landlord is reduced to what is mutually acceptable by both parties.

Rent escalations on warm-shell and a fitted-out space. A leading Biotech company recently recognized that escalations are to be paid on warm shell and not fitted out spaces, as the value of furniture and fixtures is depreciating in nature.

Let’s see how these ways of lease restructuring are helping both parties, besides giving them peace of mind.

Landlords can boost their property’s value by retaining existing tenants for longer leases. Moreover, many landlords see more security in a long-term lease as it doesn’t require them to go through the arduous process of finding new tenants. While retaining tenants helps landlords avoid the vacant period between one tenant moving out to a new one moving in, tenants find relief in the current uncertainty while enjoying continuity of their lease.

Restructuring leases provides more flexibility to both tenants and landlords who can align the terms with their future business plans. Both parties can ensure some degree of stability during uncertain times and fluctuating economic conditions.

In recent times, businesses have already benefitted from this approach. Going forward, we anticipate that commercial lease restructuring will continue to be an optimal real estate strategy.