In the last couple of months, we’ve seen COVID-19 affect nearly every single business across the country in one way or another.
To ensure both employee and business health, the majority of retail chains have had to reassess and alter their bricks and mortar operations during this time. The sudden and severe impact of this crisis has also forced many of these retail tenants to seek immediate rent relief and/or negotiate changes to commercial lease terms, just to try and survive.
Managing location and lease data for a large store portfolio is a challenge at the best of times. Now, as a result of what many say is the largest en masse renegotiation of leases ever, the sheer volume of lease variations needing to be recorded and managed will be overwhelming for businesses without the right location management systems, potentially affecting ‘on the ground’ operations, store performance analysis, financial reporting and invoice payments.
Lease understanding and visibility is more critical than ever
There has virtually never been a more important time for businesses to be able to completely comprehend their commercial liabilities and obligations, on demand. This is even more fundamental for corporate and retail tenants, where many have experienced a near-total loss of trade or interruption to operations.
While always fundamental, in these extraordinary times, such major changes in business are also likely to result in seismic impacts on their real estate and leasehold obligations.
Even with the proactive moves being made at a legislative and regulatory level to support commercial tenants and business generally, the importance of knowing what’s actually “in the lease” is more critical than ever.
Whilst most leases probably did not account for such situations as are currently being faced, there are also a number of typical provisions that may well be able to be relied on by the Landlord or the Tenant. Currently, there is a lot of talk of terms like “force majeure” and “frustrated lease”, it’s smart to ask your Lawyer.
Even more so in these extraordinary times, it is essential to be able to:
- Assess and understand individual lease situations quickly to determine the potential for positive or negative impacts, and then to allow the development of strategies or resolutions; and
- Ensure that, when changes are negotiated and agreed, they are documented correctly and communicated appropriately, for the entire business to be fully cognisant, as they navigate such challenging times and hopefully, a ‘road out’.
In addition to specific clauses for lease conditions and/or obligations on either party, we are now seeing many businesses starting to negotiate financial changes within their leases, sometimes temporary and others permanent.
So, naturally, there will be financial implications for tenants, and in a period where every dollar is more important than ever, ensuring that these are accurately recorded and managed has never been more business-critical.
Typically, the most important consideration for a Tenant will be that they are only paying the Landlord what they should be. And now with credits, rebates, waivers and even amortized charges becoming the new normal, those monthly invoices are becoming more and more complicated.
Add to this variability in monthly invoice payments, the challenge of the new IFRS16 lease accounting standards, and the need for Tenants to effectively document, manage and accurately report their lease commitments has never been greater.
Accurate management of rent relief
One of the largest business costs for tenants is rent, and now with operating environments being so significantly affected, many businesses are seeking rent relief and other changes to their lease agreements. Despite governments’ best efforts the negotiation of rental relief with Landlords will be difficult, however, the recording and ongoing management of whatever is negotiated will also be challenging, and is essential should a Tenant want to be one hundred per cent certain that what was negotiated is accurately being reflected, paid and reported on.
Probably never before in history has there been such a broad and substantial re-write of commercial lease terms as will be seen during COVID-19, and with such scope and variability across real estate portfolios, ensuring that the reality mirrors the intent will not be an easy task for many Tenants, and even Landlords.
Many of the conditions that will be negotiated will be temporary, and variable upon other metrics, such as base rent or sales performance, and so tracking these new inputs and calculations is going to be essential, let alone the need to maintain efficient workflows and processes, despite these added complications.
Without the right system for managing real estate information, the monthly variability being negotiated into Landlord invoices, such as credits, waivers and deferrals, will be more time consuming and riskier than ever.
Relying on your Landlord and Agent to issue invoices correctly will almost certainly lead to you paying more than negotiated.
Beyond just processing the approval of invoices, any organisation also having to comply with the requirements of IFRS16 is likely to face even greater challenges in managing any COVID-19 related lease amendments. Just last month, the IASB released this paper on COVID-19 related rent concessions, and could have a very significant bearing on the approach that Tenants must take in accounting for them. The result being that how the Property Team needs to record the data could actually be quite different for Finance.
Taking control of finances and manage lease changes with LeaseEagle
Getting your head around changes and working towards organising some form of financial relief is one thing – managing the changes to data, financials and legal agreements is something completely different.
Ensuring you have a system in place that gives you full visibility across your portfolio, as well as the ability to manage and track changes, is going to be vital in successfully managing the longer-term impacts of COVID-19.
LeaseEagle has long been providing businesses with the most comprehensive way to manage leasing portfolios. But since the beginning of the COVID-19 pandemic back in early March, the LeaseEagle Client Services Team has been working to ensure the system can also be geared to help manage any significant changes that Customers are experiencing.
For example, LeaseEagle has been configured to support users to easily make updates in the event of changes to rental payments and agreements:
Temporary Rental Reductions
Where a Tenant has negotiated a temporary reduction in the amount of rent payable for a set period, typically by way of a percentage amount. This can easily be done by linking a calculated charge to the existing Base Rent charge and applied for whatever the period or number of months negotiated.
Partial Rental Deferral
Under the recently announced National Cabinet Mandatory Code of Conduct for Commercial Leases it will also be quite common for Tenants to have to manage the Deferment of part of their rental payments to future lease years. If charged periodically by the Landlord as a part of rent, then this may well require the creation of a new Deferred Rent charge, not necessarily contributing to Occupancy Cost analysis but certainly requiring tracking for accounts payable purposes. It may also be the case that such a deferment could be rolled up into a new deed and thus may also require a new contract to be registered for the Site.
Lump Sum Rental Waivers
It is also possible for Tenants to negotiate a lump sum amount of COVID-19 rental relief as a rental waiver, requiring that amount to be amortized against certain charges for as long a period as is calculable. This kind of scenario can also be setup in LeaseEagle using various customised and calculated charge functions.
Rent Review Cancellation
It is also the intention of the Code that the States may cancel rental increases for affected Tenants during the COVID-19 crisis period, potentially requiring the amendment of previously fixed percentage rent reviews. Such arbitrary changes would then likely impact all future lease years, requiring re-forecasting of invoice payments and future liabilities.
The LeaseEagle team is here to help
Now more than ever, real estate data needs to be complete, well organised and easily accessed, in order to efficiently and accurately complete essential finance functions including invoice processing, business analysis and lease accounting…
To the point, if you are still not operating with the right systems and tools to correctly document and accurately manage interim lease amendments, then now could be the right time to consider specialised lease management software.
The LeaseEagle team are uniquely positioned to assist you in determining the best way to manage any new requirements or needs. If you want to discuss how LeaseEagle can help you during COVID-19 and beyond, click here to get in touch.