It is May 2nd and the Coronavirus Lockdown in Mumbai has been extended for the third time. It is a trying time for a lot of people who are paying rent on commercial real estate, especially since no one knows when the lockdown will end. There are many small businesses and corporates who are running their operations by renting shops, showrooms and offices.

The retail sector has been hit real hard with the lockdown as all non essential products are unable to open. Malls have been shut indefinitely. Retail shops such as salons, spas, boutiques, etc are shut. Restaurants are only able to take delivery orders. Even then customers are hesitant to order. Office employees are working from home, while some are able to go to the offices at 30% capacity. The entire scenario seems grim with a gloomy future.

Rent payments form a chunk of the expenses for a lot of businesses. It usually accounts for 10% to 15% of the monthly gross sales. This is almost true for anywhere in the country. However, Mumbai’s commercial real estate rents are higher. They usually account for almost 20% to 25% of the gross revenue. This is the harsh truth of Mumbai’s real estate rental market. With an uncertain future, it is imperative for every business to renegotiate their rental agreements in order to survive and ride through these rough waves.

Approach Your Property Owner Politely

This, for most, is a no-brainer but I am always surprised at the number of times tenants take a hard stance towards the property owners. The first and foremost art of renegotiating is to approach the property owner politely. It is very important to have a cordial relationship with your property owner. The most seasoned property owners aren’t usually receptive. They always look at their pockets first and have very fragile egos. A deadly combo! They have the perception that the tenants have the capacity to pay but are taking advantage of the situation. The first contact has to be made by the business owner or the decision maker. the property owner should understand the gravity of the situation.

Renegotiating Rent For Offices

Offices have the flexibility of working from home. This does depend on the nature of your business. If you have been operating but not at full capacity then that needs to be acknowledged. It is important to make the property owner realize that the business has seen a downturn. Current sales have seen a hit. Future sales and growth cannot be accurately measured. The future of the business is uncertain. Even after coming back, it will not be the same. There will be a possibility of down sizing, salary cuts and employee layoffs. Measures will have to be taken to factor in social distancing. The property owner will have to be convinced in reducing the rent by 20% to 30% for a certain period of time, say 3 months to 6 months. With the office facility not being used during the lockdown period, the rent fo the lockdown period has to be deferred or reduced to 50%.

In some scenarios, property owners have mortgages, property taxes, maintenance, etc to pay. Property owners rely on the rent to make those payments. An arrangement can be made where the rent can be reduced to match those payments. In best case scenarios, the property owner and tenant can go 50-50 on the mortgage payments. Remember there is deferment on mortgage payments not a waiver on mortgage payments for the property owner. You do not want to come to an office space sealed by the bank.

Renegotiating for Retail Stores, Shops & Showrooms

Sales for retail stores, shops, showrooms and malls have vanished. In March, Shoppers Stop refused to pay rent for 3 months citing the government shutdown due to Coronavirus. Restaurants will have to modify their entire working model to accommodate social distancing. The number of tables they can serve will drop down by half. These are trying times for retail commercial real estate. A relief in the form of rent waiver must be asked by the tenants. This will be faced with harsh refusals from everyone. Rarely, will the property owner agree to it, but these are extenuating circumstances. There are exceptional situations where developers, such as Lodha and Godrej, have given waivers for the lockdown period. Individual property owners may not agree (the Shoppers Stop rent refusal is a total rental loss of Rs. 2.10 Crores for the property owner). A deferment in the rental dues have to be demanded as a bare minimum. The deferred rent can be paid over the remaining term of the rent agreement. During the lockdown period an understanding can be reached to make basic payments of property maintenance or property taxes. This also eases the burden on the property owner.

Role of a Real Estate Agent

The role and value of a real estate agent is very important in these situations. Reputed real estate agents usually have good relationships with their clients. Ask the real estate agency to get involved in the renegotiating process. Property owners and tenants alike depend on the real estate agents experience, advice and guidance in such situations. They are very instrumental in finding a mutually beneficial solution. It is important for both parties involved to have a win-win situation. There are times where direct negotiations between the property owner and the tenant fail. Sometimes worse, there is a complete fallout in the relationship. A reputed real estate agent is instrumental in repairing the damage and finding common ground for them to unite again.

The Coronavirus Pandemic is a new reality which we are forced to accept. It does not give an excuse to avoid your contractual obligations. It is better to find a mutual and humane solution to a problem which is universal to owners and tenants alike.