COVID-19: State of the Occupier Update - Paris

All ‘non-critical’ office staff are working from home. Paris is under complete lockdown and has been since March 17th. To leave the house, one must complete and carry an affidavit describing his or her need to be out of the house. President Emmanuel Macron has extended France’s lockdown until May 11th, after which he hopes to begin to gradually open the economy and schools.

Cash flow and liquidity are at the forefront of occupiers’ minds, leading to concerns around costs. Therefore, many occupiers are curious to understand the potential for rent relief and government measures to support businesses. At this stage, government measures are only for the benefit of micro-enterprises whose activity is affected by the restrictions to contain the pandemic. A micro-enterprise is defined as a company with less than 10 employees and an annual turnover or balance sheet total not exceeding €2 million. 

Some clients are asking whether this situation triggers force majeure clauses in their leases. In order to benefit from the case of force majeure, it is necessary to fulfill three conditions: The force majeure must be unpredictable, irresistible and external. Landlords may argue that tenants cannot be exempt from the payment of their rents due to the exceptional circumstances caused by the COVID-19 pandemic. They may argue that cash flow difficulties do not constitute an impediment to rent payment. 

Tenants may argue that it is not so much their obligation to pay, but the lessor's obligation to deliver that is affected by force majeure, and that, if the obligation to deliver can no longer be fulfilled by their lessor, the payment of rentals may be suspended (because the lease itself would be suspended). 

For retailers that have been subject to administrative closure, there is little doubt that they will be able to take advantage of the suspension of their rent, and some institutional landlords have already done it. However, as far as office tenants are concerned, the question remains as to whether the lockdown, which has largely caused the closure of office buildings, gives the situation the character of force majeure. In any event, as the courts are closed until further notice (except for emergency proceedings), judges will not be able to adjudicate these matters immediately and enforcement measures will not be available.

In this context, with continuing uncertainties for all businesses and economic impacts suffered by both lessors and lessees, it is in the common interest of the parties to find a mutual agreement for the payment of rents during the period of the lease.

OCCUPIERS?

Occupiers are asking for rent relief, rent abatement, rent-free periods and rent holidays. Our tenant advisory team is currently representing clients to support rent relief actions. So far, we have seen two kind of landlord reactions: 1) Answer positively but generally below the client’s expectations, and 2) A preference for rent deferral rather than an abatement.

No general rule can be established at this stage as the trend is extremely recent and it is on a case-by-case basis. 

Also, 25% of staff in France are now in “partial activity.” A payback is granted by the government for companies implementing this initiative. This will have an impact on the country’s budget.


LANDLORDS? DEVELOPERS / INVESTORS?

Landlords and investors are carefully monitoring impacts on rents. At the moment, they seem to be adopting a “wait and see” approach.

For ongoing deals with current lease negotiations, landlords are becoming more flexible. 

In the short term, there will be a considerable amount of discussion among landlords and tenants for immediate rent relief. It is too early, at this stage, to generalize the outcome of these discussions. In the longer term, we expect the market to become more tenant friendly as vacancy rates increase, particularly in Paris. When the lockdown period is over, we expect lease re-gear opportunities and potential moves to locations where rents are lower. We should also see an increase in landlord incentives. 

Before the pandemic, attracting and retaining talent was a primary consideration. Going forward, cost-saving considerations may re-emerge as a theme. Many firms may also look to review office work practices. Occupiers are currently testing work-from-home capabilities, which we may see adopted more widely even after the pandemic ends. Companies may look for ways to downsize their space with workplace redesigns and more permanent flexible working arrangements.

Contact us.