Commercial Leasing: Brazil Enters a Post-Coronavirus World
In this Chambers Expert Focus article, Maria Flavia Seabra and Ivana Coelho Bomfim, partners in the Real Estate practice at Machado Meyer Advogados, discuss what COVID-19 has meant and will mean for the commercial leasing market in Brazil.
Reasonableness, balance, and new working habits were the main lessons taken the pandemic by the Brazilian real estate market, particularly the commercial leasing market. What some feared would be generalised disorder – with a moratorium on rent payments, vacating of spaces, and the collapse of property prices – did not happen. Instead, new opportunities arose, the famous real estate maxim “location, location, location” showed itself to be as true as ever, and adaptations of and new uses for old spaces became a worldwide trend.
Brazilian courts strike a balance on leasing
The onset of the pandemic, the rush of the population to their homes, the initial brake on consumption and commercial activities, and the attendant economic slowdown led to an urgent need to reduce costs and, in particular, rent. Brazilian courts began to rule on emergency situations that were presented to them in relation to leases in effect, such as claims for temporary exemption from payment of rent and exemption from penalties for the early vacation of a property.
"The interference of the judiciary in private contractual relations should be minimal."
Two years into the pandemic, the courts have come to a settled position to the effect that the interference of the judiciary in private contractual relations should be minimal, unless there is unequivocal proof that unforeseeable and supervening circumstances have directly impacted on the commercial activity and the billing capacity of the legal entity that pleads for revision. That is, only in situations where there is a notorious imbalance in the leasing relationship.
In discussions regarding the application or non-application of a penalty in cases of early termination of commercial leases, the courts have tended to adopt solutions that rule out the allocation of the burden solely on the lessor, preferring a reduction in the amount of the penalty or adoption of a different calculation from that initially provided for in the contract, as a way of equally distributing the burden of the economic crisis between lessor and lessee.
Remote working and the future of the office
Along with uncertainty as to what the post-coronavirus real estate market would look like came the first bets that it could be the end for the “traditional” city-centre office, replaced by the home office as the definitive new working model. As a consequence, predictions of less movement of people, less traffic, greater use of alternative transportation to avoid crowds, and people leaving the big cities and migrating to the suburbs and satellite towns, among many others, were made.
Now, in March of 2022, when the World Health Organization (WHO) is discussing the downgrading of COVID-19 from pandemic to endemic, the main urban centres in Brazil have already lifted mandates regarding the use of masks indoors and corporate activities are resuming with greater intensity. What has in fact happened thus far and what will the real impact of COVID-19 be for the commercial leasing market?
"Along with uncertainty as to what the post-coronavirus real estate market would look like came the first bets that it could be the end for the “traditional” city-centre office."
Many sectors of the economy have experienced the benefits of home-office working: a better work-life balance; no wasted time in commuting; reduced food, clothing, and transportation costs; and greater efficiency in some tasks, resulting in increased productivity. As time went by, however, the downsides of working from home began to appear: an increase in the number of cases of mental illness due to overwork and the absence of social interaction; a decrease in creativity and exchange of experiences; losses in the development and maintenance of company culture and, consequently, a loss in worker productivity, which had been the main positive point of the home office. As a result, while the home office may be here to stay, it will be as part of a hybrid model, seeking as many of the advantages of remote working and as few of the disadvantages as possible.
Social distancing and the consequences of home working for so long have shown that it is necessary to prioritise collective creativity and the effective exchange of experiences during the period when employees are in the office, requiring more collaborative corporate spaces. Investment in technology and productivity tools are similarly vital to the success of the hybrid model and there is a need for greater information security given the boom in digital fraud and data breaches.
Moreover, the realisation that physical distancing is effective in reducing the transmission of diseases has necessitated new lay-outs for offices and, in some cases, the need for their expansion.
New uses for commercial spaces
Some economic sectors have undergone particularly lasting and significant changes. In the education sector online courses have taken centre stage, leading to a fall in demand for classroom space. Meanwhile, logistics has exploded, investment in the sector is rising and the shortage of storage space needed for efficient delivery is notorious. Stores and points of sale no longer need to stock goods in large volumes and some of them have pivoted to become spaces for product presentation and experience by potential consumers, since the actual purchase is being made online. It remains to be seen whether the various impacts on different economic sectors will balance each other out, or whether they will generate an actual decrease in the demand for commercial leases.
What we see in the post-pandemic commercial leasing real estate market is that, besides location, which has not ceased to be essential, new issues such as the sustainability of commercial buildings and the availability of ancillary infrastructure to accommodate the new needs of users (bike racks, lockers, social spaces, etc) will make the difference in the success of these developments. The search for green buildings and for buildings with state-of-the-art technology and modular and adaptable architecture, which allow various uses for the same space, will be important differentials in tenants’ choices and in the success of the investment in this very significant market.