8th April, 2020

Commercial tenants: Striking a deal with landlords

As trade for businesses operating retail, hospitality and many other sectors come to a grinding halt amid the COVID-19 crisis, tenants rush to negotiate new rental agreements in Australia and New Zealand alike.

As governments order retail stores to close their doors amid the COVID-19 spread, the question about how these business owners are meant to pay their rent with no income has raised its head.

In Australia, the Federal Government has mooted a new Code of Conduct for retail landlords, tenants, and banks. The Code will be mandatory, and allows for commercial tenants in financial distress to receive rent reductions through waivers or deferrals.

The Code – which will be legislated by each state and territory – will also compel landlords not to terminate leases, and pressure tenants to honour those leases.

But how commercial tenants conduct these negotiations with landlords is not yet clear. It’s a daunting prospect for many, and unknown territory for all.

Already, the Property Council of Australia has said in a statement it will seek more detail about how the Code will be implemented.

“We must avoid a situation where too much of the burden of delivering relief for tenants is expected to be carried by commercial property owners, which include many smaller investors and businesses themselves,” the PCA said yesterday.

In New Zealand, the situation is similar, with much confusion regarding what leeway commercial tenants have when it comes to paying rent during the lockdown period.Commercial lease agreements, paying rent and more under lockdown

In many cases, tenants are simply pleading for leniency after being forced to close their doors. They’ve been left with no choice but to try and negotiate a reduced monthly rental agreement with landlords also stretching to pay the bills in many cases.

Letter of the law

Ballantyne Law Group director James Ballantyne advises tenants and landlords to open the door to communication as soon as possible to strike a deal.

Possible concessions that might be considered by landlords include temporary relief, rental reductions, moving to outgoings-only arrangements, rent deferrals and other incentives, Ballantyne explained.

The legal aspects may differ between Australia and New Zealand, and from state to state, particularly with retail shop leases. Tenants should seek appropriate advice in their own jurisdiction.

“Landlords have holding costs and interests, and must protect their investments,” said Ballantyne.

“But in many cases, it’s likely that assisting an existing tenant to keep their business alive will result in a better commercial outcome than terminating the lease, pursuing guarantors and finding new tenants in an uncertain economy.

“With the recently announced changes to insolvency and bankruptcy processes, this choice becomes starker.”

To assist landlords in making commercial and compassionate decisions, tenants should make polite and reasonable approaches to their landlords and be prepared to provide supporting material about their requests – including financial statements, cash flow forecasts, operational information and comparative rental relief information.

“There may also be some other legal principles that may result in the termination of the lease – again, this must be dealt with on a case-by-case basis, and may not be the commercial outcome that many tenants need.”

Meanwhile, Australian banks have stepped in to provide support for commercial landlords such as payment deferrals to support their tenants affected by the coronavirus pandemic.

Meanwhile, the New Zealand Government has negotiated a six-month home mortgage deferral scheme with retail banks.

Clarification is to be provided on any similar relief available to landlords with mortgages on commercial properties. This is likely to be possible, but subject to lending criteria, particularly the level of debt gearing against the property and projected lease income for the period of deferment.

Again, these are being worked out on a case-by-case basis, so tenants are urged to contact their bank directly for up to date information.

How to broach the conversation with your landlord:

  • Check your lease agreement: Determine if you have any provisions for rent relief, in particular “No Access”, “Frustration” or “Force Majeure” clauses.
  • Start a dialogue: Contact your landlord and be open about the situation you’re in. Be open about your intentions to trade beyond this crisis.
  • Come prepared: Draw up a strategy to propose to your landlord. These could include a rental freeze, a short-term rental discount or a lease extension.
  • Provide documentation: Provide details about cash flow, staffing position and any government orders to cease trading amid this crisis so the landlord can understand your situation.
  • Seek legal advice: Contact a contract lawyer and ask for advice based on your individual circumstance to see what options are available to you.
  • Stimulus payments: If you’re eligible for a government stimulus package payment, make sure you communicate this to your landlord. Be clear about whether the payment has been made, or is on the way.