Covid-19 has dramatically affected real estate. We directly saw it because one of our clients, whom we will call “RealAlity” (invented name, of course!), had to face the full power of the Covid-19 crisis.
RealAlity owns a wide portfolio of commercial premises all over the UK, and internationally. As the pandemic struck, it’s no news that 90% of retailers had to temporarily shut down. As the lockdown progressed, temporary closures ended up being permanent for those that could not afford to be in business anymore.
Being a landlord of commercial premises means to be able to handle each of those cases differently, which in turn means looking at the contract as a necessary starting point for every renegotiation.
To put it simply, RealAlity was asking itself:
- What are my rights and duties in the event of a pandemic?
- What are the rights and duties of the lessee?
- Is Covid-19 to be considered a case of force majeure?
- Does the lessee have to pay the rent or are there any rental holiday clauses?
There wasn’t, of course, an univocal answer to those questions – in many cases, as lawyers like to say, the answer is “it depends”. It depends on what the agreement says.
Now, reviewing a large number of agreements to decipher the terms of the agreement and find out what is possible to do – and what are the basis of a possible renegotiation with the lessee, takes time. An incredible amount of time.
We were called to help with a herculean task, to solve their issue, fast.
Issue #1 – Documents in multiple formats
The first issue that RealAlity was facing was that their agreements were stored in a multiplicity of formats. Many of the agreements were in non-readable formats: originally in paper form, they were scanned in a rush during a digitalisation project. They were in most cases, pngs or jpegs or pdfs. Many others were in Word – which is the favourite format of lawyers, indeed.
The first step in every technology that involves artificial intelligence is to make any document into machine readable form. This was possible thanks to a technology called Optical Character Recognition – for reference, OCR – that enables you to convert different types of documents, such as scanned paper documents, PDF files or images into editable and searchable data. We decided to make OCR a constitutive part of Cognitiv+ .
We were able to process the documents and turn them into machine readable form for our software to do its magic. Next, how do you find the right clauses?
Issue #2 – identifying relevant clauses at scale
RealAlity needed to identify all of the clauses that mattered during the Covid-19 pandemic, so that they could potentially be leveraged for a renegotiation of the agreements.
- Force majeure
- Hardship clauses
- Unoccupied premises
- Rent free period-rental holiday clauses
- Assignment Clauses
- Forfeiture Clauses
Our lease abstraction tool is an AI-enhanced technology that can recognize key obligations and clauses from leases and tenancy agreements, and extract them. The final product is the lease abstract: in an easily navigable document – usually in Excel or Word format, which includes the most relevant legal and financial information included in the lease agreement, together with a clear breakdown of each parties’ obligations.
Once we understood the RealAlity requirements, we trained the software to recognize and extract all the clauses that they wanted to identify and extract for quicker reference.
Once the documents were uploaded, the OCR technology transformed the agreement into a machine-readable file and the artificial intelligence system sifted through the contract looking for relevant provisions, extracting them into an Excel file.
Benefits of Lease Abstraction in Real Estate
Lease abstraction provided 3 fundamental benefits to RealAlity:
- Risk mitigation. The possibility to comply with all aspects of their leases and understand their rights and duties substantially reduced the chance of making mistakes
- Integration. Our lease abstraction technology could integrate and work together with RealAlity’s proprietary software to track important dates/events and set reminders, for instance for collecting late fees, interest, rent, maintenance costs or increased renewal rates.
- Strategic decision. Lease abstracts can be leveraged to provide a wide range of information necessary to make strategic decisions, to assess whether the portfolio is adequately diversified and for creating value.