Property developer: The current situation is not force majeure, office rent must be paid

English2020. nov. 2.Növekedé

Office development projects and leases continue despite the coronavirus, Nikolett Püschl, development and leasing manager at Atenor told növekedé The pandemic doesn’t qualify as force majeure from a contractual perspective, so they can’t offer discounts on rents just because most companies have the majority of their employees working from home, she added.

How did the coronavirus affect Atenor?

As the previous years, this year also got off to a good start; we didn’t feel any difference.

We are lucky because since the outbreak of the epidemic in March the number of lease contracts that we signed has been the same as those in the same period in previous years.

Moreover, it is up to a large transaction currently being negotiated whether we close the year with the same result as before or even better. What next year will bring is a big question, but we are well prepared.

Atenor is a classic property developer company: we buy the plot, develop the property, rent it out and sell it as soon as possible. We no longer deal with office buildings that we had developed and already sold, so we have no insight into the current situation of their tenants, but it is a fact that all buildings are 100 percent rented out. We are in contact only with tenants who are currently renting space in a building we own. As a result, we do not have anything to do with the extensions of the lease contracts; we only deal with the new leases.

Last year, we signed new lease contracts for 15,000 square metres, and we expect a similar result for this year as well.

How have rental prices changed?

What is perhaps more important than the size of the leased area is that our rental prices have not changed; we kept them at the same level as before the pandemic.

In the Váci Greens Office Buildings, rental prices were steadily rising in recent years, reaching 16-17 euros/square metre last year, and they remained the same this year.

Our last transaction was closed a few weeks ago, so we are not talking about contracts concluded before March. I consider this a positive achievement.

This is related to the outstanding quality and service that we provide. Our target clients, i.e. large international and domestic companies with hundreds of employees do not settle for less; and this is a trend I do not expect to change. The demand has obviously changed since the Covid outbreak; we have had cases where we started to negotiate with a potential tenant about a certain number of square metres but in the end the contract was signed for a smaller area only.

From a developer’s perspective, however, it doesn’t matter whether we lease the same area to one large or three smaller tenants.

Flexible spatial design is also very important. We provide higher than average basic technical content and, in addition, a significant extra design contribution, which gives tenants a great deal of freedom to create their ideal office design.

What extras do category A tenants expect?

The standard technical specification we provide differs from that of other developers / lessors in several respects. For example, most lessors limit the extent of partitioning; the typical standard is 70 percent open-space and 30 percent cellular offices. If a tenant wants to change this and wants a 100 percent cellular design for example, other lessors charge them considerable extra fees for this. We implement the most modern engineering systems: radiators for heating with the use of district heating, and the cooling and fresh air supply is provided by a chilled beam system. The rate of fresh air supply in most office buildings is 35m3 / hour / workstation, but in our case 50m3 / hour / workstation is the norm, which is especially convenient in open-space shared service centres, but it also means that even larger conference rooms do not need extra machinery and so tenants do not have to pay extra for it.

In many of the international companies employees are now working from home; there are new ways of working. How does all this affect the rental market?

One of the differences from the pre-epidemic period is that the new contracts tend to apply to smaller rented areas than originally planned.
Finding an office is a long process, which can take months, even a year, as tenants give themselves enough time to make a decision. We don’t know much about the current status of our existing tenants as they are not required to share with us, for example, information whether they have had layoffs, if so, how big, or what percent of their employees are working remotely.

As far as we know, unofficially, the majority of tenants currently have an average of approximately 25 to 50 percent of their employees working in the offices.

Fortunately, we don’t have any tenants who wanted to give back part of the leased area.

We have long-term contracts that we sign for a minimum of five years, and despite the uncertain situation, the majority of our tenants are aware that they will need these offices in four or five years.

We hear more and more often about the practice that companies renting large floor space re-lease areas that have become unused because of remote work in order to optimize costs. This is possible, as although unused areas cannot be given back, it is permitted by the contract to pass on part of the leased area to other companies.

Many people believe that subletting these empty areas will be a competitive disadvantage for developer-landlords.

We are not afraid of this. Firstly, because in most large international companies the corporate policy does not allow them to subrent offices. Secondly, because of the high expectations of category A tenants, which I mentioned earlier: for these tenants, apart from the location, which is still very important, design is the next most important aspect, and tenants who would now sublet their unused areas will not be able to do the necessary fit-out works and bear the costs.

Are there any companies that are now looking for offices?

Yes, there are, we are currently negotiating with many companies, usually about thousands of square metres of floor space.

Although there is unfortunately a decline in our overall performance; however, we concluded several large transactions in the second and third quarters of this year,too.

You mentioned that although companies try to return unused office space, they can’t. Why not?

As far as I know many tenants have tried, especially between March and May. Legal action could be taken in the event of a serious breach of contract, for example, but this is not the case here.

Even if a company decides to switch to remote working, the proper use of the building and the rented property continues to be ensured, so the tenant is not exempt from paying rent and is not entitled to return any floor space.

These are long-term agreements and are mostly uniform in terms of their content; other property developers’ contracts, either Hungarian or foreign, contain almost the same conditions, i.e. they do not allow either party to simply terminate the contract. Before signing a contract, tenants need to think about how much office space they can commit to and take responsibility for the decision in the long run, the same way as we commit ourselves to constructing the building and the rental property on time and guaranteeing the “A +” category services.

Nobody could foresee the current situation where thousands of workers have to be sent home or even laid off. This could be considered a case of force majeure.

Indeed, no one expected this extraordinary situation, and the issue of force majeure was constantly being discussed throughout the spring; we also had a lot of discussions about that with our legal representatives.

However, the epidemic does not constitute force majeure for the validity of the contract.

It would be considered force majeure, for example, if the use of the property was made impossible, for example due to a natural disaster or a full lockdown, but this was not the case. It is also important to take into account what function or service is affected.

In shopping malls, for example, the situation of retailers is not black and white, as although the stores were open, their turnover fell significantly.

Despite the economic downturn during the pandemic, developers are spending many millions of euros so that they finish the construction of the properties on time and they can provide the expected level of service.

Similarly, tenants also need to abide by their commitments during these difficult times, so they have to find a solution to the current challenges themselves.

Which are your ongoing development projects?

The portfolio of Atenor is nearly 240,000 square metres in Hungary, of which a relatively large part, 130,000 square metres, belong to the six buildings of Váci Greens. It was last week that we had the closing ceremony of the entire project, as the sixth building was given occupancy authorization. More than 85 percent of the 130,000 square metres has already been rented out. Our other major project is the Arena Business Campus, at 30 Hungária körút. Here, the first phase was handed over in May; in the second building the shell and core works have been completed and it is due to be handed over next year; while the third and fourth buildings are to be handed over in 2022 and 2023.

Our newest projects are taking place in Buda: in September, we received the building permit for RoseVille, a 15,000-square metre office building in Bécsi út, which will be handed over in the first quarter of 2022.

And in the 11th district, at the corner of Hengermalom and Szerémi út, we have a project called BakerStreet, with 18 thousand square metres, which we plan to hand over in mid-2022.