2020 has been a year. There’s not much more to say about it that hasn’t already been said. As we start 2021, should we move forward and try to forget that it ever happened (even though it has mostly carried over into the new year)? Or should we look back and take some lessons with us in the future? CAN we bring any of 2020’s lessons into the future, assuming (hopefully) something like this doesn’t happen again in our lifetimes?
After considering what we saw in commercial leasing last year, a few different themes stood out that could be useful to keep in mind in the years ahead. They all boil down to one point, though: what type of landlord you have matters.
Over the last year, many commercial tenants’ fate depended on their landlord. A tenant in a small strip mall, a standalone building, or a large shopping mall had vastly different experiences in 2020. One way to distinguish types of landlords is whether they are Corporate (large organizations with multiple properties) or Independent (small, owner-operated businesses or “mom and pop shops”). These are not legal or defining terms but showcase the key characteristics that highlight the different pros and cons of each over the last year. You should keep these differences in mind if you start a new practice or buy an existing one because the differences won’t just apply to 2020 but to your entire term as a tenant.
Being a tenant of a Corporate Landlord comes with a particular set of expectations and experiences. This would typically be the case for those running dental practices in shopping malls, large suburban plazas and medical buildings. Corporate Landlords often have the capital to invest in maintaining their properties at a high standard. They may be able to provide perks like attractive common facilities and fewer administrative or maintenance requirements for the tenant. Of course, these perks generally come at a premium on the rental rate. You might also anticipate these Corporate Landlords to be relatively inflexible to deal with. Corporate often means policies and procedures that must be followed with little room for individual discretion.
Over the past year, our clients had various reasons for interacting with their landlord and were sometimes surprised at the results. How did dentists with Corporate Landlords fare in 2020?
Lease Renewals/New Leases
Tenants renewing their leases or trying to negotiate new ones after March of 2020 thought they might get lucky and be able to negotiate rental rates at a huge discount, or at least introduce better terms into their leases. This is not the case.
In many cases, Corporate Landlords have deep pockets allowing them to wait out short-term market changes. As a result, they were not willing to entertain lower rental rates. Despite all the news last year of commercial tenants not being able to make their rent payments and walking away, these landlords even moved ahead with planned rent increases. Some were slightly receptive to amending a few lease terms, but they generally stuck to their existing policies, which didn’t leave room to negotiate more tenant-friendly terms.
Government Program Participation
However, Corporate Landlords tended to be much more willing to participate in programs like Canada Emergency Commercial Rent Assistance (CERCA), which has since been replaced by Canada Emergency Rent Subsidy (CERS). Participation in these programs required landlords and tenants to come to an agreement regarding rent reduction for a certain period of time. This imposed an administrative burden on landlords while asking them to accept 75% of their usual rent temporarily.
The size of Corporate Landlords means they have accounting departments more than capable of handling this extra paperwork across all of their properties without imposing too much of an additional burden. So dentists with Corporate Landlords frequently found it straightforward to have their rent reduced for some time in 2020.
Having an Independent Landlord is often the case for dental practices in smaller towns, strip malls, or standalone buildings. This can lead to a completely different tenant experience. As a tenant of an Independent Landlord, you may get to know the building owner personally. A relationship like that might win you some favours or leeway if you happen to run into financial difficulties. If your landlord knows you as a person rather than just another account, they may be more willing to work with you to reach a solution that works for you both. On the other hand, you may not experience the same level of resources and perks as tenants of Corporate Landlords. You may take on more obligations as a tenant, dealing with things like property maintenance or more general repairs.
So, how did 2020 differ for dentists with Independent Landlords from those with Corporate Landlords?
Lease Renewals/New Leases
Unlike the tenants of the Corporate Landlords, who were surprised they couldn’t negotiate lower rents, tenants of Independent Landlords were often able to keep their rental rates from rising and sometimes managed to have them reduced. We even saw this happen with some dentists that had terms in their leases expressly excluding that possibility!
To an Independent Landlord, each tenant is significant to the bottom line. They may not be as willing or able to let a tenant go and leave a space empty. This gives them more of an incentive to reach an agreement with existing tenants. That also means they can be further inclined to negotiate more tenant-friendly terms in leases.
Because of this kind of tenancy’s more personal nature, success in negotiating depends considerably on a tenant’s relationship with their landlord. If the relationship is purely transactional or, worse, hostile, the Independent Landlord likely won’t give the tenant any concessions.
Government Program Participation
Although the Independent Landlords were easier to work with on some aspects of a tenancy, we didn’t see the same when it came to participation in CECRA. Many tenants had an uphill battle to convince these landlords to participate. Independent Landlords have very few employees and, in some cases, have no employees at all. This lack of resources means the additional burden of these programs’ required documentation and administration has a much larger impact. The smaller size of their operations also meant Independent Landlords weren’t as able to withstand only receiving 75% of the usual rent, even for a short period.
While this pandemic illuminated some clear distinctions between different types of landlords, the pros and cons will affect each dentist differently. You need to look at the structure of your practice(s), or Dentistry Professional Corporation(s), and your financial position to determine which would be more beneficial to you. Keeping these lessons of 2020 in mind can then ensure you’re better prepared for future lease negotiations. Commercial leases need a long-term perspective. Recognizing what kind of landlord you are entering into a legal relationship with can ready you for what may be in store.
You don’t need to weigh out the benefits of each on your own. We negotiate commercial leases for dentists every day and are happy to help ensure you and your business are protected. Send DMC an email or give me a call directly at 416-443-9280 extension 208. Whether you are entering a new agreement or renewing an existing lease, we have you covered.