Shared pain, shared future is the best way out for tenants and landlords

Commercial lease agreements were never crafted for times of pandemic. As the weeks bleed by and customers are kept from stores and restaurants by fear and fiat, tenants increasingly cannot meet their rent bills. Landlords are becoming stranded as their incomes drain away.

The domino effect is in full swing. And when the contract cannot hold, things threaten to fall apart. Some will rush for the exits with cries of force majeure even as others try to bolt the gates.

That which is not up for renegotiation is up for trouble. Classic conflict theory talks of three options: a resort to power, an appeal to law and then “interest-based” negotiation.

A resort to power or law may take various forms as niceties evaporate. Those with market muscle may try to crash through. Big retailers may attempt unilateral rent strikes, big landlords may threaten litigation to enforce their notional rights. For some, the only option may be to walk away, insolvent.

The language of the recently formed Property Industry Group (which speaks collectively for the country’s largest commercial property owners) goes to the third, problem-solving approach: “We’ve seen retailers reverting to legal positions, but we don’t believe that litigation provides either side with timeous solutions needed to get through this unprecedented time. We need to stand together and find workable solutions that will benefit the country, protect jobs and sustain our businesses through this challenging time.”

There is the trap, though, that one party — usually the more powerful — will presume to know the best interests of all and try to project its position as the master solution for all. Genuine engagement is a tricky business. How best should the parties engage to boost the prospects of viability for everyone on the other side of all of this?

Laissez-faire interactions are unlikely to cut it. It is hard to be dispassionate and discerning in this climate. Better to have structured settings, with rules that have the measure of the times. SA policymakers might want to draw some guidance from their Australian counterparts (who, incidentally, if spared a second coming, appear on the cusp of crushing the virus). Across the Indian Ocean, an emergency national cabinet comprising federal and state governments has fashioned a mandatory code to govern the renegotiation of commercial leases. The code’s language is instructive, with the notion of proportionality featuring prominently:

• The overarching objective is “to share, in a proportionate, measured manner, the financial risk and cash flow impact during the Covid-19 period, while seeking to appropriately balance the interests of tenants and landlords”;
• Landlords and tenants “share a common interest in working together ... to facilitate the resumption of normal trading activities at the end of the Covid-19 pandemic”. They must “negotiate in good faith, and in an open, honest and transparent manner”, with each obliged to provide “sufficient and accurate information to achieve outcomes consistent with this code”;
• Any agreed arrangement must “take into account the impact of the Covid-19 pandemic on the tenant, with specific regard to its revenue, expenses and profitability. Such arrangements will be proportionate and appropriate based on the impact of the pandemic.” Landlords must offer tenants “proportionate reductions in rent payable in the form of waivers and deferrals of up to 100% of the amount ordinarily payable, on a case-by-case basis, based on the reduction in the tenant’s trade during the Covid-19 pandemic period and a subsequent reasonable recovery period”;
• Landlords may not terminate leases due to nonpayment of rent and tenants must remain committed to the terms of their lease, subject to amendments negotiated under the code; and
• Any dispute must be dealt with by mediation or, failing that, binding determination.

SA tenants and landlords find themselves in code-free country for the moment. Neither the cabinet nor the department of trade & industry has as yet tried to set the table. Last week the Property Industry Group called on the government to come in as mediator to help resolve the impasse around what share of rent and taxes major retailers should be paying as the lockdown runs on.

The negotiations under way will affect the existence and future of thousands of businesses and the livelihoods of hundreds of thousands of people engaged in the retail and hospitality sectors. The post-pandemic prospects for economic recovery are being determined now. It is fair to say that the agreements carefully crafted or clumsily botched in the months just ahead will be at least as significant as all of the collective bargaining between employers and unions that happen this year. How will the negotiators fare? What outcomes will they deliver?

Unlike labour market players, these parties have no institutions tailored to support them. Positional bargaining — take it or leave it, or grind out an ugly compromise — is unlikely to serve the national interest. Sophisticated “mutual gains” bargainers, reconcilers of interests, are rare beasts. Will a 2020 version of the 1994 “Cyril and Roelf” duo materialise?

Punting on the emergence of heroes is not the best way to manage risk. The parties need an engagement framework — principles, processes, skills, recovery mechanisms, facilitators and umpires. Serious collaborative problem solving should be at the core of the engagements. Shared pains, shared futures. Only inventive, inclusive and dynamic solutions can square this predicament, and one size will never fit all. Much better to get the first path-finding engagements right than having to resort to mopping up the mess later in downstream conflict management and protracted litigation.

But societies seldom prepare for pandemics. Necessarily, though, they move heaven and earth to deal with them when they erupt. And so it is with dispute avoidance and conflict resolution. Typically not much is invested upstream in the architecture of negotiation, but everyone responds to a building collapse.

With a bit of prescience, the balance of 2020 may be a time for designers rather than excavators. A good institutional setting would help. But heroes are handy too.

• Thompson is a lawyer and mediator.