Has COVID-19 changed the lease agreements?

  • by Propertymakkerz
  • 8 months ago
  • Editorial
  • 1
Has COVID-19 changed the lease agreements

The unprecedented time of COVID-19 has inspired the world to see changes that were never thought of. As a result, there has been a steep decline in the growth of businesses. Since a large number of commercial offices are set up in a leased space, leasing takes up a large percentage of a company’s revenue. Therefore, in the last one year the business owners have been engaged in negotiations with their lessee to modify the lease agreements in the first place.

Corporate lessees are now finding ways to reduce the impact of COVID-19 on their businesses. Amendments to lease agreements have been a top concern for businesses. One of the major paths covered by business owners includes discounts or rebates in rent. Another aspect discussed in relation to lease agreements is the extension of leasing without any rent increase. The Covid-19 inspired lack of consistently positive cash flow has prompted business owners to revise their agreements.

Keeping in mind the terrible impact of the pandemic on the business owners, various companies have revised their lease agreement up to 50% with rent reductions keeping in mind the respective lessee. Following the implications of COVID-19, some agreements were changed except for the exemption of rent.

In addition, the changed work practices meant fewer office locations. With more than half the employees working from home, the companies had completely unused locations. Due to this aspect, many commercial lease agreements were amended with space reductions. Although the changes are not in the interest of the landlords, they are ready for negotiation. The reason is that if the lessee vacates the locations, it is challenging to find a new tenant, especially after COVID. Another major change in some commercial lease agreements was the extension of the lease term without any annual increase in rent. Thus, with the consent of both the lessor and lessee, there were agreements that were amended with extended lease tenure without any increase in rent.

Force Majeure likely in lease agreements. The term with intercepted relevance in the context of a lease agreement is ‘force majeure’ and the term can be included in the commercial lease agreement after COVID. Force Major is defined as an event that cannot be controlled or anticipated. Although it is not specifically mentioned in Indian statutes, the Contract Act states that in case of an improbable event, a contract may be void. For the force major clause to be active, the incident must be beyond the control of both parties. If the event is proved to be a force, the parties may not be allowed to fulfill the obligations they had incurred when signing the contract.

Following COVID-19, a forced agreement cannot be summarized into a lease agreement. The clause should be incorporated in such a way that it tolerates every circumstance that may affect the agreement. For example, after the lockdown ends, offices operate with half the workforce. Thus, the lease agreement was used but not fully. In addition, the force majeure clause can affect the process of paying rent. Likewise, the lessee may be exempted from paying the rent indefinitely due to a large incident of force. Not every agreement has a Force Major clause. But, the lessee will now be consistent with the addition of a Force Major clause in their respective lease agreements.

The bottom line is that some companies are working with the existing lease agreement, while others have managed to change their agreements in the final year of COVID-19. With the second wave of pandemics, there is no certainty about this, if things will return to normal, to surround the nation. Therefore, various clauses are being debated with tenants and landlords for altering lease agreements. However, it is certain that lease agreements in the COVID era will continue to develop in the coming years.

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