Post-Covid lease agreements

The situation on the real estate market has changed as a result of the global Coronavirus epidemic. Nevertheless, this situation is temporary and properties will continue to be an integral part of every business.

Despite the mode of remote working enforced by the pandemic, firms will gradually return to the previous model of working in an office, but of course in a different reality, and according to a different formula. Today, as never before, people are impatient to return to their offices as more and more people are lacking the social factor in their lives, which only a direct contact with colleagues can offer. Therefore, properties will continue to play a significant role in each business, and now is the ideal time to manage formal issues related to them and review the respective lease agreements, as well as consider their format and content in the future.

Lease (rental) agreements are an integral part of commercial properties, in particular in the Retail industry. The landlord or the tenant should ensure that the lease agreement includes all optimal clauses, while ensuring a symmetry of the rights and obligations of the parties. Such agreements in the Retail sector are often highly disproportionate in terms of the rights and obligations of the parties: the landlord imposes an unfair portion of the obligations on the tenant and potential financial penalties for a wide range of potential negligence on his part. It is particularly important to analyse lease agreements in Retail operations as the rent and the related costs often come up as the second or third line on the firm’s balance sheet.

What steps should be taken before concluding a lease agreement?

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1. Careful review of the content of the lease agreement

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2. Analysis of its completeness and the content of the clauses

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3. Analysis of the consequences and effects of each clause

Each of the above-mentioned points comprises a number of factors that play a significant role in lease agreements:

Profile of the agreement:

  • Name of the building
  • Address and location details

 

Parties to the agreement and their data:

  • Tenant
  • Landlord

  • Supplier

Details relating Dates of the agreement

Dates of the agreement:

  • Date of conclusion
  • Date of transfer of the space

  • Commencement date

  • Termination date, etc.

Regular payments:

  • Basic rent

  • Parking

  • Warehouse/ Storage room

  • Service charges 

  • Property tax

 

 

Additional costs resulting from the agreement:

 

  • Maintenance costs

  • Common area maintenance

  • Utilities costs

Indexing of rent and changes in payment

Active / available options:

  • Early termination

  • Renewal and automatic renewal of the agreement

  • Extension and reduction in space

 

Details relating to the security deposit:

  • Type of security

  • Amount and date of payment

  • Date of returning the deposit

 

Rights and obligations of the parties:

 

  • Area maintenance and changes
  • Repairs and renovations
  • Insurance (building, space)
  • Additional clauses

 

  • Sublease and assignment clauses, i.e. clauses relating to the transfer of rights under the lease agreement to another entity, have become very important. In practice such clauses are concluded more and more often, with the respective option for the tenant, on condition of prior notification and official acceptance by the landlord.
    • However, it is worth paying attention whether such clauses have not been limited to specific entities in the agreement – only those belonging to the tenant’s group. These conditions will be particularly onerous for small groups due to the narrow range of possibilities, and for entities that are planning changes, especially a spin-off of part of their business. In such a case the clause limiting the options to the tenant’s group may have a negative impact on its business and will have a significant impact on, and to a certain extent dictate, the business terms.

Check whether as a tenant you have the right to sublease/assign the lease to any third party without restricting these rights to your group.


  • Another important element in lease agreements, in particular for the tenant, is the possibility of early termination of the agreement (the so-called Break Option) and the terms and conditions of giving notice. This is particularly important for agreements signed for a period of more than two years.
    • In this respect also the terms and conditions of potential early termination should also be analysed. The landlord often imposes an additional penalty if the tenant wants to avail itself of this option. It is worth noting the amount of the penalty which may be defined as “rent payable until the end of the term of the agreement”. In practice, in financial terms this means that the tenant is obliged to pay the rent until the agreement officially expires, which in turn ultimately means there is no possibility of terminating it earlier. Therefore, such a break option gives only an “artificial” possibility of terminating the agreement before the end of its term.

As a tenant you should check whether the agreement provides for a break option after giving prior written notice and without significant additional financial penalties for doing so.


  • So-called automatic renewal is also an important element of an agreement. Some agreements include clauses indicating that at the end of the agreement term it will be automatically renewed on the same terms if no prior written notice of termination is given (e.g. 3 months before the term of the agreement expires) to terminate the agreement at the end of its term. 

    • This means that if the deadline for handing in notice is missed, the tenant will be obliged to officially remain a party to the agreement and continue the lease. In consequence it will be obliged to continue paying all the resulting costs. This unplanned situation can negatively impact the tenant’s balance sheet and constitute a significant cost burden that, unfortunately, may be difficult to negotiate with the landlord.

    • Therefore, it is the tenant’s responsibility to monitor all similar notices which may have such financial implications. Therefore, it is advisable to ensure that a proper “reminder” procedure is set up at the agreement review stage for the tenant’s lease management team.

Check whether there is an automatic renewal option in the agreement and ensure that it is properly monitored, and that the deadline for handing in the notice is not missed due to a mistake or oversight.

  • The tenant should pay particular attention to any clauses that provide for financial penalties. An in-depth analysis of the lease agreement in terms of potential financial penalties will enable the tenant to accurately reflect the so-called “worst-case scenario.” 

    • As an example, it is worth mentioning one of the lease agreements in Warsaw, which we were recently asked to analyse. The gross monthly rent was approx. EUR 7,000, and the agreement contained several potential financial penalties which were not mutually exclusive, which the landlord had the right to impose on the tenant in various situations. The sum of all potential penalties was approx. PLN 1.8 million, which is almost 60 times (!) the basic monthly rent.

    • If the firm signs the lease agreement which provides for basic rent of EUR 7,000 it exposes itself to a potential cost of PLN 1.8 million, which is significant for business decisions and should be analysed before approving such an agreement.

Check the maximum sanctions and financial consequences resulting from financial penalties that you could incur in the event of the worst-case scenario.


  • Another important clause in terms of potential negative effects is the “Competition” clause, in particular if this clause is used with reference to the tenant. 
    • Another example is an agreement in which this clause prohibits the tenant from opening a business within 50 km of the location of the said leased premises under penalty of the equivalent of twice the annual rent and service charges. 
    • This requires precise planning of the tenant’s business development strategy while making sure that the firm does not decide to expand its operations in the vicinity of the leased premises during the term of the agreement.
    • This clause is rather restrictive for the tenant, and at the same time it gives the landlord significant financial and business privileges. It is an example of the disparity between the rights and obligations under the agreement for both parties. It is worth noting that in this particular agreement the landlord is not bound by an identical clause, which means that in the same building it leases premises to the tenant’s competitors. Therefore, only the tenant is exposed to higher costs of promotion, among other things, due to the presence of its direct competitors in the immediate vicinity. 

Check the restrictions for your business strategy resulting from the lease agreement.

Conclusion

Summarizing the above aspects and recommendations, it should be emphasized that apart from analysing particular Retail lease agreements it is worth having an overall view of all lease agreements in the property portfolio before signing them. It is important not only to check them, but also to keep an up-to-date register of all data and information related to lease agreements in a consistent and precise manner.

For topics relating to managing lease agreements during the COVID pandemic, we invite you to check out our Webinar from 8 December 2020.

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Contact us

Kinga Barchoń

Kinga Barchoń

Partner, Real Estate, PwC Poland

Tel: +48 22 746 4178

Agnieszka Ostaszewska

Agnieszka Ostaszewska

Managing Partner, Assurance Leader, PwC Poland

Tel: +48 502 184 348

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