COMMERCIAL PROPERTY - DEALING WITH DEFAULTING TENANTS AND RENTAL RELIEF DURING THE PANDEMIC
Category Advice
The past year has been challenging for the commercial property sector. The Covid - 19 pandemic has presented a set of challenges at a level that in recent history has not been experienced. Although the South African economy was in decline even pre pandemic (late 2019), we witnessed the resilience of tenants across our managed commercial property portfolio. Although times were tough, tenants managed to make provisions to meet rental commitments allowing owners to also meet their financial obligations.
The scope of our management function noticeably changed to allow for the challenging conditions over the past twelve to eighteen months and thankfully is somewhat normalising now. Financial management (invoicing/reporting), expense control, operational facilities management, lease negotiations and the management of vacancies are some of the standard property management functions which we have continued performing over this period. Credit control and the management of defaulting tenants have become vital aspects of our property management function. Communication and negotiations between landlord and tenant became a daily occurrence across our managed portfolios.
We have identified some important aspects in dealing with defaulting tenants and providing potential relief during these times. Some may be obvious, but act as reminder of how to deal with comparable scenarios in the future.
- Communication - we have found that one of the most important factors both from a landlord and tenant perspective is that of communication. Both parties need to communicate and be understanding about respective positions.
- Be understanding. Overwhelming financial commitments can be experienced by either (or both) a tenant or a landlord and both parties need to be mindful of this. Traditionally, pressure has been placed on landlords to provide rental relief and we have seen that tenants have been less understanding when it comes to considering the landlord's financial position. Many landlords have financial commitments to banks, the local municipality, body corporates and other creditors with very little (if any) relief having been passed during this period.
- Be reasonable. As a result of 'force majeure' (specifically for those leases that exclude a clause covering this) there are grounds for an open discussion regarding the possibility of rental relief. It is mostly possible to reach common ground and a reasonable compromise, fair to both parties.
It has been our experience that the landlords who adopted (and continue to adopt) the above-mentioned principles, have yielded the best results out of an extremely challenging time caused by the pandemic. These landlords have seen a higher rate of tenant retention, lease renewals have been forthcoming and generally tenants have shown loyalty towards these landlords. Conversely we have found that tenants that communicate, are empathetic and reasonable have received a more sympathetic approach from landlords. These are the tenants generally considered more favourably when lease renewals arise.
Tenants appear to be in a stronger position now compared with six months ago and things have somewhat normalised on the property management front. We certainly don't consider it to be "smooth sailing" ahead, but consider ourselves to be prepared for more testing times.
Author: David Porter