Risk Management in a COVID-19 Commercial Property World

Risk Management in a COVID-19 Commercial Property World

14 July 2020

What does the new normal appear like in the world of commercial property, and specifically, in the workplace?

CR Commercial Property Group (CRCPG) will consider five business and five practical points that property Owners, Landlords and Tenants in the workplace ought to be thinking about in preparation for the return to ‘normal’.

High Risk Business Points for Consideration
  1. Outgoings
    The above practical considerations raise concerns regarding the payment of service charges under a lease. Should building systems struggle to re-start following an extended period of inactivity, who will bear the costs of any remediation works – should this fall within the outgoings? The starting point here is to consult the lease, however many tenants may well argue that they did not request for systems to be changed; so should property owners pay completely?The recovery of any additional expenses of the property owner such as cleaning, preparing policies and treatments and, preparing the structure for social distancing will likely be sought through the service fee, albeit not being anticipated by property managers in the preparation of annual budget plans pre-Coronavirus. Whether this can be challenged by a renter will come down to the analysis of the lease and, typically, whether the measures are ‘affordable’ in the scenarios or, in the interests of good estate management. Landlords in a multi-let property need to therefore consider how the service fee will be calculated if some occupants return to the workplace whilst others are advised from returning or choose not to.Landlords and tenants need to be aware of the RICS professional statement for service fee in residential and commercial property. Effective from 1 April 2019, the statement sets a marker for the requirements of management and offers mandatory obligations that RICS members and regulated companies must comply with.
  2. Terms of the lease
    Tenants considering new leases will likely be seeking much shorter terms with greater flexibility. With a prospective boost in nimble working, occupants may re-consider their existing area and whether moving to a smaller sized space is feasible. Landlords and occupants ought to be examining term end and break dates in their leases and, commencing early conversations, particularly if a lease is due to be renewed or a break date is nearing. This could be a ripe opportunity for a proprietor to redevelop and avoid statutory payment if a tenant does not wish to renew.
  3. Future ‘COVID’ provisions
    Landlords may receive requests from tenants seeking new leases to include a ‘COVID’ provision in their lease. Similar to current lease abatements for insured risks, such a provision could mention that the rent will not be payable, either in complete or in part, in the event of a future lockdown. Landlords will, naturally, wish to prevent this at all expenses and with the involvement of lenders and insurance providers in many deals, it may not be an alternative at all. Worldwide pandemics have not traditionally been covered within ‘Insured Risks’ under a common landlord’s structure insurance plan, and following the present crisis, we presume that will remain the case with the threat inevitably falling squarely on the landlord’s shoulders. Landlords will be weighing the risk of having an empty premises against an opening of the floodgates, especially as many obtain a portfolio of tenants, and will require to make business decisions as to whether they are prepared to consent to such an arrangement.
  4. Fit out and advancement
    Landlords and tenants who have agreed upon either redevelopment work or fit out works respectively, may have seen those works cease during the lockdown. Parties have most likely agreed on stringent time frames in an arrangement for lease or, licence for modifications for such works to be completed. Tenants of brand-new leases are most likely to therefore reduce their rent-free duration as they are unable to complete their works. It is therefore important to negotiate an extension of time with landlords as tenants seek to increase their rent-free period.
  5. Discounted rents
    During the lockdown, numerous property managers and occupants will have agreed lease concessions or holidays. As soon as the present moratorium on forfeiture ends, and subject to any additional legislation that is employed, occupants should carefully consider the possible threats of forfeit and other proprietor treatments which they could be exposed to if agreements are not reached with their landlord.

 

Practical points for consideration
  • Management of people traffic within common parts
    Many property owners and occupants are currently preparing for social distancing in the work environment. It will be crucial for property owners to be able to work collaboratively with their renters to manage concerns such as lobby and lift spacing, evaluating fire evacuation procedures, and restricting ‘touch points’. The smooth circulation of people in and out of buildings is crucial for Landlords to consider and thus implement strategies to ensure this is achieved. With the pandemic altering our way of life, many tenants work commute is not exempt, with landlords needing to bear in mind the increased likelihood of greater commuter centres such as bike racks, communal showers and altering rooms.
  • Management of individuals traffic within the work environment
    Tenants will need to manage their own customers, clients and workers whilst considering implementing staggered staff members’ break, surface and start times and communicating this with their landlords. The separation of desk space and limiting numbers in each workplace to guarantee social distancing may also be required.
  • Staggered returns to the building
    Landlords of multi-let properties will need to closely speak with their occupants to develop return times. Who has the ability to return may be governed by central assistance however, who wants to return might be a different matter. As soon as constraints are reduced to assist with managing the process, landlords may choose to engage with their occupants at an early stage to determine who is looking to return to workplaces.
  • Re-engaging structure systems
    As the NSW official lockdown commenced in March, building systems, such as air conditioning, may have been either switched off or operating at a minimal level. As we return to the office, ensuring that buildings have adequate and up to date systems and devices, that have been potentially adjusted to increase external air flow, must be considered for building supervisors.
  • Health and safety
    While we wait for any additional health and security legislation around the management and profession of industrial structures in light of Coronavirus, occupants and landlords will need to guarantee that their task of care to their visitors and personnel is fulfilled. Tenants will also be required to consider additional hygiene facilities and approaches within their updated workplace policies.At present, it appears that questions are being postured at a quicker rate than responses are being offered however, the more questions that you ask yourself as a tenant, the more likely you are to be ready for what is to come.
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