What happens when your tenant cannot pay rent due to the COVID-19 pandemic?

The rapid spread of the coronavirus (COVID-19) has forced the abrupt closures of shops, restaurants, cafés and other businesses in multiple countries. Like many of us, commercial and residential landlords and their tenants are now at breaking point.

Thousands of tenants will be unable to meet their rental payments due to the pandemic. In normal circumstances, this would trigger a breach of the lease agreement, and allow a landlord to cancel it and claim arrears or sue for damages.

However, these are unprecedented times and, while there is simply no clear-cut answer, throwing out your tenants during an international crisis is probably a bit insensitive.

In the UK and USA, governments have granted mortgage holidays to prevent the economy from crashing. If the South African government follows suit and provides banks with interest-free loans, it is essential that landlords pass on this benefit to their tenants.

Until then, those landlords who are concerned about a possible default in payment should engage in dialogue with their tenant as soon as possible.

Residential tenants

Preparation and negotiation are always better than non-payment. Have an honest and forthright conversation to find out how your tenants are coping financially with the national lockdown. It is important that tenants do not presume that the coronavirus outbreak is a green light to stop paying their rent.

If the tenant is genuinely unable to meet their financial commitment, then consider proposing alternative measures. Perhaps agree to a partial rental deferral or a reduction in the amount of rent due, even if only for a short period of time.

If a reduction is required over a longer term (between three and six months or even longer), then there are ways for you recoup any amounts owing to you.

One option is to arrange for the loss of rental to be included at the end of the lease. Another option is to extend the lease period by the number of months that the tenant was unable to make full payments. Some tenants might oppose this option, however, as they will end up paying more due to the escalation clause.

Commercial tenants

Businesses of all sizes are hurting, especially non-essential retailers who have been forced to close their doors because of the national lockdown. The fight for survival in the commercial world is fierce, with some of the biggest names becoming victims.

Clothing retailer Foschini Group Ltd has already announced that it will be stopping rental payments for all its 2,582 outlets until the lockdown is lifted.

Smaller businesses are likely to feel the pinch the most. Landlords here should again contact their tenants at the earliest opportunity and begin negotiations, if required.

One option is to permanently or temporarily convert the lost rental to a turnover-only basis, without a base cost. This means that the tenant will eventually pay back the rent shortfall from its future profit.

If this is not possible, you could suggest that the tenant would continue to pay essential operating costs, such as electricity, water, and security services, etc. This way, you ensure that the property does not go into disrepair while it stands vacant.

You should also encourage commercial tenants to check whether their insurance policy makes provision for Business Interruption.