The mechanics of the landlord and tenant relationship and the bargaining positions of each party are constantly shifting. That relationship can often be tested by external factors, and the current pandemic is a prime example. The extraordinary circumstances brought about by Covid-19 have caused governments to intervene more than they usually would in the commercial sphere.
Across the GCC, as restrictions on movement of personnel and access to leased premises have been imposed, the effect on both landlords and tenants can sometimes seem unclear. In circumstances like this, both landlords and tenants need to take a practical approach. Landlords need to be mindful of the long-term revenue impact of losing tenants who are not able to withstand the cash flow pressures that come with servicing rental payments during these constrained times. Tenants, on the other hand, need to be careful not to be seen to be abusing the situation by demanding too much of their landlords.
One challenge we can see developing is where the authorities have made decisions to require premises to open up, e.g. food and beverage outlets, but at restricted capacity. Tenants in those situations might feel that the cost burden of opening (such as the staffing obligations that come with that) with significantly reduced footfall is simply not attractive enough. By being required to open, however, a key plank of a tenant's demand for reduced rent is taken away - it can no longer so easily argue force majeure.
Real estate consultancies have been taking soundings in the market to see how the current situation is likely to change the negotiating stances of tenants. Highlights include:
- Tenants of fitted out units are seeking rent-free periods of between two to four months, whereas previously some landlords might have been willing to grant one month at most;
- Tenants of shell and core units are looking for a much longer rent-free period, to allow for the likely delays in mobilisation and access; and
- Tenants across the board are looking for a reduced notice period for termination without penalty, arguing that flexibility is essential in a rapidly changing environment.
We wonder also whether we might be begin to see express provisions in leases allowing for mid-term rent free periods tied to concept such as lockdown, as opposed to the historic reliance on relatively vague provisions around force majeure. There are of course provisions under the legislative regimes that could potentially be relied upon (such as Article 523 in the Bahraini Civil Code which deals with the effect of the actions of a governmental authority on the enjoyment of property), but landlords and tenants of commercial space have always preferred absolute clarity on the face of their leases. Perhaps more definition will be required in terms of what 'quiet enjoyment' means in a GCC context.
This article takes a brief look at the current position in the UAE and Bahrain as an example of the measures being taken across the region, and compares that to the situation in the UK. We should note that the position is ever-changing and we recommend that our clients contact us for the most up-to-date position before taking any action.
United Arab Emirates
The approach taken in Dubai has been to urge landlords and tenants to negotiate their respective obligations under leases as a priority. This advice has been supplemented by express direction from certain judicial authorities, as well as support measures from Government in respect of some costs. DEWA charges for water and electricity have been reduced by 10% for residential, industrial and commercial users for a 3 month period with a pre-payment reduction of 50%. The Dubai Judicial Council issued a directive to suspend all eviction judgments (in the cases of both to residential and commercial properties) issued in March and April.
The press has picked up on various reports of landlords waiving rental penalties, although this has mostly been in the case of residential developments so far (e.g. a circumstance where a tenant needs to leave the UAE owing to redundancy, and where a 'diplomatic' clause might not previously have been incorporated in the lease). There have, however, been a number of instances of commercial landlords announcing plans to support their tenants.
For example, Dubai Holding and Meeras have issued statements that they "will be offering such support on a case-by-case basis for tenants, principally commercial, at developments such as City Walk, Bluewaters, and La Mer". Another example is where the Al-Futtaim Group has declared that it will allow rent relief for tenants of up to three months. Dubai Media City similarly has talked about being open to receiving requests from tenants for assistance by way of rent holidays and the like.
Retail groups in Dubai have recently made proposals that retail tenants in the Emirates which currently have long-term leases should have two to three months’ notice periods made available, should circumstances require notice to be served as the international situation develops.
The Dubai International Convention and Exhibition Centre and One Central have introduced guidelines offering up to six-months rent-free on base rent (1 April 2020 – 30 September 2020) for retail tenants impacted by mandatory public lock-down restrictions.
In the case of the DIFC specifically, the Dubai Judicial Council released a statement setting out various stimulus measures:
- Postponement of rent payments by a period of six months;
- Facilitating instalments for payments;
- Refunding security deposits and guarantees; and
- Cancellation of fines for both companies and individuals.
Abu Dhabi has similarly introduced a moratorium on evictions, other than in situations where a property has been abandoned. As a more interventionist example, Aldar Properties has announced programmes worth AED 100 million aimed at supporting its residents, tenants, customers and partners to support them in these tough times.
In addition, the Abu Dhabi Department of Economic Development has announced the availability of a 20% refund on annual commercial leases for restaurants, tourism and entertainment facilities which can be applied for online by businesses. The refund is to be calculated against fixed rental costs for those leases commencing from September 2019, or which were renewed during the period from 1 April 2020 until the end of September 2020.
Bahrain
The Kingdom of Bahrain has taken a number of steps to shore up the wider economy, which will have an impact on leasehold management by easing cost pressures on tenants when revenues might be down. The Government's stimulus package includes the following key policy points:
- Paying the entirety of all EWA bills for individuals and businesses for three months beginning in April 2020 to the value of bills issued for the same period in 2019;
- An exemption from municipal fees for three months for all individuals and businesses;
- An exemption from industrial land rental fees for three months;
- Increasing Central Bank of Bahrain loan facilities to financial institutions to BHD 3.7 billion to allow the deferment of debt instalments and the extension of additional credit to individuals and businesses; and
- Full cover for the salaries of all Bahraini employees for a period of three months.
Not dissimilarly to the UAE, private companies have been implementing new policies and entering into negotiations with their tenants. For instance, Edamah - the property investment arm of the Kingdom's sovereign wealth fund - waived charges and collections for its food and beverage and retail tenants for March, whether payments were due in advance or in arrears.
Anecdotally, we know that some major landlords of shopping malls have offered their clients rent-free periods during this crisis, regardless of whether the Government has directed that shops remain closed.
Background in UK
With the closure of non-essential business premises (only recently adjusted as part of a staged return to a semblance of normality), the UK Government has set out a priority to avoid "aggressive rent collection and closure" on the highstreet; being aimed at landlords of commercial, mostly retail premises. This will be facilitated by:
- A ban on the use of statutory demands until the end of June 2020 (to then be reviewed);
- A ban on the use of winding up petitions on tenants that cannot pay bills owing to the pandemic until the end of June 2020; and
- Secondary legislation to prevent landlords using Commercial Rent Arrears Recovery (often known just as CRAR) unless they are owed 90 days of unpaid rent.
As in the cases of Bahrain and the UAE, British landlords and tenants have been reporting that re-gearing and negotiation of terms has become a rational and practical step. It has been reported that commercial trade-offs have been established, for example with the deletion of a break clause to incorporate a rent-free period, or agreeing the settlement of rent reviews in exchange for a rent free period or reduced/stepped rent period.
Next steps
If you are affected by the impact of Covid-19 on a lease, as either a landlord or a tenant, please do get in touch with us to discuss your circumstances.
