FOREWORD BY EDITOR, ANDREW CHILVERS
As the Covid-19 pandemic continues to disrupt businesses across the world, one of the biggest debates being played out is the future of property – in the city centres and suburbs; in office space, commercial and residential.
Just what will the world of real estate look like at the end of 2021? Will cities return to normal, and office space and retail malls remain the same, or will they be changed forever?
Most legal and financial advisors in the real estate sector agree there is an element of crystal ball gazing, but likewise there are now clear signs of how things might just look in the near future.
Helping clients in the new normal: How are legal advisors assisting clients during the ongoing pandemic lockdowns? How important has the Counsel role become?
We’re experiencing similar issues here in California. We’ve gone back and forth on the restrictions with businesses allowed to open and then required to close again. This has led to a lot of commercial landlord/tenant issues. Many tenants aren’t able to pay full rent, and this is where we’ve found that our role has really changed and become more hands on. Prior to Covid19, a landlord/tenant issue regarding rent was typically fairly simple: did the tenant pay rent or not? However, we now have tenants who are unable to pay because of Covid-19 and landlords who are trying to interpret force majeure clauses in their leases and trying to understand how a defence like impossibility might work. Then we also have eviction moratoriums, a federal moratorium and a state of California moratorium. To add to the
complication, we also have county and city eviction moratoriums, so our clients really need help in understanding what their options are. If they need to allow the tenant to pay less rent, how much less and for how long?
All of this can lead to negotiating a new lease or amending the existing lease. We’re heavily involved in those conversations. There is room for flexibility; in many cases, landlords are willing to make some concessions to ensure steady payments, and struggling tenants are more flexible as well in return for rent relief. Many tenants are truly struggling, but the eviction moratoriums have also likely led to some tenants being opportunistic. That’s become a bit of a difficult situation, and we’re seeing landlords involving counsel more than they usually would.
Sound of the suburbs. As more people and businesses flee city centres for the suburbs, will real estate investors look more closely at long-term suburban development projects?
There is some movement to the suburbs in California. It’s worth noting that many workers have now adjusted to working from home or companies have introduced “flex-time” for their employees, realising they can be more productive if they don’t have to commute to the city every day. This might lead to more of a satellite office concept for some businesses where they have employees working from home part time and then maybe smaller offices where there are staggered shifts.
I think the office market was starting to struggle a bit previously, and that has just been accelerated by Covid-19. Businesses are looking for shorter term leases and smaller spaces. Some large companies have already said their employees can work from home indefinitely.
We’ll likely see this shift away from a large office space in the city for certain sectors, but it’s also important that a lot of businesses remain in cities – although they may well downsize.
“The mall stores are done.” How long will it take for shopping malls to recover from Covid-19 in your jurisdiction?
We were already seeing shopping malls reinvent themselves in the ways that others have touched on, moving a little bit towards more restaurants, more entertainment. That’s certainly been accelerated by Covid-19. One thing we’ve seen is that from a landlord’s perspective most shopping malls are subject to strict use restrictions from anchor tenants who didn’t want office buildings in the mall, didn’t want so many entertainment-type facilities to take away from parking. Now there’s been more flexibility where those tenants are willing to eliminate those restrictions, maybe for some Covid-19 rent relief. They’re starting to understand now that it is crucial for the future of shopping malls to be able to reinvent themselves in this way. Landlords can help them by giving rent reductions in exchange for more flexibility than they had before.
We’ve also seen tenants trying to negotiate a percentage-based rent structure, which is difficult because these retail stores likely aren’t going to be doing as well themselves. If landlords can negotiate including a percentage of their online sales as well, as Philip mentioned, that could be an interesting structure.