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The State Duma has adopted amendments on the termination of lease agreements. What does business think?

Published on RBC

21 /05 2020

Enterprises of small and medium business from the most affected sectors of the economy will be able to unilaterally cancel the lease agreement until October 1 and not to compensate for losses in the form of lost profits

The State Duma passed in the second reading a bill that allows small and medium-sized businesses to unilaterally terminate the lease agreement without penalties.

This is reported on the website of the lower house of parliament. Amendments only for small and medium businesses.

The lease amendments were part of a package of measures to counteract coronavirus infection, which was initiated by the Russian government. The bill provides new measures to support citizens and businesses in the conditions of coronavirus proliferation, including tenants.

Initially, it was supposed to allow tenants to terminate the agreement unilaterally with a decrease in monthly income of the tenant by more than 50% from the moment of introduction of the regime of high readiness or emergency situation on the territory of the subject. The security payment, if it is stipulated by the agreement and paid by the lessee, was subject to return. Also, it was not specified which companies were in question.

By the second reading, the bill was amended. Now it is possible to terminate the contract unilaterally (in case the tenant refused the discount on the lease) for small and medium businesses. In this case, companies must operate in industries affected by the spread of coronavirus infection. This list is determined by the government. Companies may terminate their rental agreement only until October 1, 2020.

"Tenants from the most affected industries will be able to unilaterally terminate the lease agreement until October 1 and not compensate for losses in the form of lost profits, but the security payment will remain with the landlord," the Duma website reported. The third reading is scheduled for May 22.

Experts polled by the RBC Real Estate editorial office consider the new version of the leasing bill to be the most optimal, but it will not solve all problems.

Shopping centers

Owners of shopping malls continue to oppose the amendments. However, they consider the compromise option found by the business together with the State Duma experts to be the most correct one. An important point of the amendments was called the restriction of the draft law to small and medium-sized businesses, and the one in the register of the most affected industries.

"Small and medium business is about 20% of the rent collection in large shopping centers and 30-40% can make up the total turnover of shops in the same shopping center. Since small business has the most help from the state, I think that it is too expensive for him to withdraw from the store, which he rents, termination of the contract may cost him more. That's why I don't think that small business will use this amendment en masse", - said Oleg Voitsekhovsky, Managing Director of the Russian Council of Shopping Centers (RCTC).

In his opinion, federal and international chains in this situation will optimize their business or, referring to the amendments, will ask to revise the parameters of the contract - for example, rent at 1% per turnover for the entire term of the contract, otherwise they will threaten to leave.

"All shopping centers were built for specific tenants; banks calculate cash flows based on a set of tenants. Therefore, to break up all lease agreements is to destroy the economy of retail real estate, bump banks and eventually create problems for the federal economy as a whole", - added Mr Voitsekhovsky.

According to Olesya Nikitenko, Director of Retail Property Department at Accent Capital, many representatives of small and medium-sized businesses with weak concepts will rather make a decision to terminate than remain with a difficult predictable recovery in demand. Despite active statements from retailers, most developers will try to find a compromise to maintain previously successful concepts and reduce the vacancy rate. "The legislator has given 14 days for such negotiations. This will allow the parties to quickly resolve issues for further cooperation. At the same time, in each facility we can expect the termination of up to 20% of contracts", - said the expert.

Olesya Nikitenko Director, Retail Real Estate

The Association of Retail Companies (AKORT, which includes more than 20 federal retail chains in Russia) believes that amendments in this form do not solve the problems of the vast majority of tenants.

"In the current economic situation, one of the most important directions is to support small and medium-sized businesses. However, more than 75% of tenants do not belong to SMEs. Thus, the adopted edition does not solve the problems of the overwhelming majority of tenants from several sectors of the economy, which form a significant number of jobs. For non- SME tenants, the possibilities to preserve the MBF and financial stability without revision of rental payments under current conditions are now very limited", said Sergei Belyakov, chairman of the Presidium of AKORT.

According to him, in turn, a significant number of counterparties - suppliers of non-food products and food - largely depend on them. In addition, the problem, voiced by farmers at a meeting with the President, as well as his instruction to expand the possibility of purchasing products from them, will now be more difficult to solve. One can expect serious problems with both tenants (restaurateurs, retailers, the whole service sector) and contractors of these companies.

Fitness industry

The Association of Fitness Industry Operators believes that the amendments will allow small and medium-sized companies in the industry to bring some argument in the dialogue with landlords to reduce rental.

"Now fitness clubs are absolutely powerless: we invest huge amounts of money in premises that do not belong to us, we bear all the risks, and we can withdraw from contractual relations only with huge fines, which are sometimes as much as the annual rent," - said the President of the Association of Fitness Industry Operators, Olga Kiseleva.

At the same time, the changes, which were adopted with persistent lobbying by landlords, significantly reduce the assistance to companies in the fitness industry - as in the industry there are a lot of large networks, included in the list of systemically important enterprises that have thousands of people on their staff, and no less SMEs in need of government assistance in dialogue with landlords.

"In its current form, this amendment will not particularly help the industry: we still predict that 70% of the industry will disappear, because large chains are left out, and they make up more than 30% of the entire market, while small and medium fitness clubs, in addition to rent, are burdened with other unresolved problems," added the representative of the association.

Warehouses

Warehouse properties will be least affected by these amendments - there is a supply shortage and the industry itself was least affected in the pandemic. "As far as warehouse real estate is concerned, we do not expect an increase in the number of cancellations due to this law. This is largely due to the fact that the warehouse segment can be considered the least affected part of the real estate market", - said Konstantin Fomichenko, Director of Industrial and Warehouse Property Department of Knight Frank.

Warehouse is an important point in the logistics chain of goods distribution, regardless of how the goods eventually reach the end consumer: through offline trading channels or online channels. In both cases, the company needs warehouses where its goods are stored, processed and shipped. It will therefore be very difficult for the tenant to give up the warehouse.

 

In addition, in case of termination of the contract, it will be difficult for the tenant to find a new facility. According to Knight Frank, the vacancy rate in warehouses in the Moscow region in the first quarter of 2020 was only 2.5%, and in the regions - about 4%. "That is, the choice of alternative quality offer for a new warehouse is minimal, and sometimes there is no one at all (for example, in Nizhny Novgorod or Vladivostok). At the same time, due to the current situation, the volume of new construction is reducing," - explained the expert.

Thus, in warehouse real estate cases of termination will be most often encountered when the company as a whole ceases to operate.