“The conflict between mall owners and tenants will soon escalate”
Denis Kachkin, Partner, Head of Real Estate and Investment practice Dmitry Nekrestyanov shares his expert opinion.
Many foreign brands, despite loud statements about leaving Russian market, are in no hurry to give up their space in shopping centers and continue to pay rent. Whether the work suspension is a violation of contractual obligations on the part of retail operators and what legal consequences may arise because of this, Dmitry Nekrestyanov, Head of Real Estate and Investment practice at Kachkin and Partners, told Novyi Prospekt.
Lease agreements for large anchor operators have their own specifics in relation to smaller ones, so it is wrong to say that the parameters fixed are the same for everyone. The situation in each case is individual, and we can only talk about the «average hospital temperature.»
As a rule, the condition on the store operation period is formulated in favor of the anchor tenant. Thus, he can conduct activities at any time agreed upon by him, but not always is obliged to do so. If the need to keep the store running is nevertheless included in the lease, this usually entails some kind of property sanction, such as a fine, and in case of prolonged violations, the opportunity for the landlord to demand termination of the contract.
In general, the situation when the rent is paid, but the store itself does not work, generates losses for the shopping complex. This happens either in the form of a rent loss (the landlord receives a percentage of the turnover), or in the form of indirect losses (a traffic decrease in the shopping center and the financial performance of other tenants).
However, if the first consequence can still somehow be substantiated by simply comparing the revenue statements for the period when the store was operating and when it stopped doing so, then indirect losses are much more difficult to prove. At the same time, the agreement, as a rule, provides for the possibility of suspending activities for a limited number of reasons with prior notice to the lessor.
Now we are witnessing a large number of high-profile statements about “leaving Russia” of various companies. However, in reality, it usually turns out that we are talking about the suspension of activities, since formally firms continue to pay rent, salaries to employees, etc. In addition to the purely political reason for stating such a position, there is a second good reason — disruption of supply chains, which creates risks or leads to a sharp drop in the range and the inability to fully work.
Moreover, we are seeing only the beginning of political statements transformation into legal actions. We receive preliminary requests from tenants and representatives of shopping centers to assess the terms of contracts in terms of the consequences of continuing such a “closure”. However, so far most companies have taken a wait-and-see attitude or are in active negotiations. The owners of shopping centers are well aware that it is very problematic to quickly change the anchor tenant in the current conditions. In this regard, active actions to evict operators who stopped their activities and continue to pay rent do not make sense yet.
Very curious lawsuits from landlords are also known, for example, an appeal to the court to recognize the decision of a foreign company to suspend activities in Russia as invalid. I can hardly imagine how the applicants plan to implement such a decision, even if they win such a dispute.
There is no doubt that by the end of the second quarter of 2022, the situation with suspended tenants will worsen, and the owners of shopping centers will begin to take active steps to protect their interests. Among the measures taken, obviously, will include negotiations on receiving, as compensation, the remaining goods and equipment in stores (they are at least available, and in the face of a decrease in inventories they will be very liquid).
In addition, we should expect litigation on the recovery of rent arrears from retailers, as well as penalties and fines, on the termination of leases and evictions, and after the moratorium on bankruptcy and the start of similar procedures. Obviously, the courts will be heavily loaded with such disputes if the situation does not stabilize in the near future, which cannot be reliable yet.
The material is published on the «New Prospekt» website 26.04.2022
PhD in Law
Head of Real Estate and Investments Practice, attorney
PhD in Law
Head of Real Estate and Investments Practice, attorney
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