Prime Minister Scott Morrison has announced that the National Cabinet is working on a ‘Mandatory Code’ to protect both tenants and landlords in the current economic climate. While we will provide an update on this ‘Code’ once it is formally announced, the PM has indicated that it will be up to individual landlords and tenants to negotiate in ‘good faith’ to agree on how best to balance their respective obligations and liabilities when it comes to commercial leasing.
As a tenant, re-negotiating your lease terms can be a daunting task. Below we set out some key things for tenants to consider when trying to negotiate more favourable lease conditions:
- Be honest and communicate early: There is no point hiding the fact if your business is under substantial financial stress and trying to pay rent if it is unsustainable. If you’re struggling, be honest and open up communications with the landlord early, don’t wait until you’re verging on having to shut your business down to reach out to your landlord.
- Know your numbers: If your business has been affected by any of the new restricted trade or social distancing rules, have a handle on your numbers before contacting the landlord. If you can definitely say to your landlord that your sales are down by say 25%, they may be more inclined to negotiate a rental reduction which is equivalent or close to the specific loss you are currently suffering, than if you just ask for a seemingly arbitrary reduction.
- Understand your liability: Understanding the extent of your liability under your lease will put you in a stronger position to negotiate. For example, if you’re at the end of your lease term you may be able to negotiate a little harder as the landlord will likely want to ensure that they have a tenant in the premises long term and thus be more willing to negotiate conditions to entice you to continue to trade. However, if you still have several years to go on your lease term and you’ve provided extensive security in the way of large security deposits, bank guarantees or provided a personal guarantee your liability is greater and you’re contractually locked in for a longer period. It’s also important to consider any obligations you may have under any equipment finance, hire purchase or business loan facilities as the terms of these agreements may be dependent on you maintaining the lease and terminating the lease or failing to pay rent may trigger an event of default under these third party arrangements.
- Be fair and reasonable: There aren’t many people or businesses who are not affected by the COVID-19 pandemic and economic repercussions so be fair and reasonable in your negotiations. Remember that the landlord may have a mortgage they’re paying or may be relying on the rental income to cover their personal expenses so it’s not always as simple as putting your rental payments on ‘hold’ for 6 months. Be prepared to listen and make adjustments to your expectations.
- Be flexible: There are numerous options for landlords and tenants to consider when negotiating rental payments including:
- changing the amount of rent to be paid for a period (say a reduction in rent of 25% for 6 months);
- a rent free period (for example a 3 month period where no rent is payable);
- a delay in payment of the rent (same rent is payable but the obligation to pay is deferred to a later time);
- extension of the term of the lease to accommodate any rental concessions.
- Seek Help: We have prepared a standard form of letter which tenants may use as a first step to negotiate more favourable rental conditions to assist them in continuing to trade through this period. If you’d like a free copy of this letter, please contact us.
For further information in relation to any legal issues arising from Covid-19 or if you need to discuss negotiating changes to your commercial leasing or licensing arrangements, please contact us.