COVID-19 has caused many issues for businesses – and will continue doing so for some time – but one of the ‘stickier’ areas we’ve seen a lot of our clients struggle with is negotiating commercial rent relief. This has been difficult for both landlords and tenants.
Although the new Code of Conduct released on 9 April 2020 provides guidelines, it still talks about ‘good-faith’ leasing principles being negotiated individually between landlords and their tenants.
We see both sides of the coin, and we have been helping tenants who have had to shut their businesses as well as landlords whose only source of income is property (there are two sides to this issue).
Even post-pandemic, it’s likely that many white-collar businesses may be looking to revisit their tenancy arrangements, as the concept of working from home, or certainly more flexibly, takes further shape, reducing the need for large areas of expensive commercial space.
As landlords and tenants continue to battle with all of this, it needs to be remembered that there should be no ‘winning’ side – negotiations need to be fair to all.
Tenants need to understand:
- Some landlords rely on property as their only source of income. They still have fixed costs that they themselves must meet. Even with banks deferring payments for six months, that doesn’t change ongoing costs like council rates, electricity, water rates, insurance, etc.
- You can’t just say ‘I don’t want to pay rent’ or stop paying rent, without talking first. That is not fair and will not get you far. A reduction in rent or deferral is a fairer outcome.
- A reduction in turnover needs to be proved in order to justify a reduction in rent.
- There are more government subsidies available for tenants than landlords, such as the cashflow boost, instant asset write-off and JobKeeper – make sure you apply for what you’re eligible for, as this will help take some of the pressure off your rental costs if your turnover has declined.
Landlords need to understand:
- You’re in business with your tenant. If your tenant is going the extra mile to innovate and create different revenue streams during this period, then you should show willing and negotiate how to assist them in relation to rent.
- Although the lease is a signed document, you can and should deviate from it during the crisis if needed – flexibility is required.
- There are more rules governing your actions and behaviour (vs. your tenant), including things like the new Code of Conduct, so make sure you’re up-to-speed.
- If you are suffering financial hardship ask your financial institutions for a temporary mortgage freeze or reduced payments; check if your insurance covers rental default; and check eligibility for the recently announced land tax reductions.
Finding a happy medium
Our clients have found the new rules and guidelines around commercial tenancies confusing. But the bottom line is that it comes down to making your own arrangements, having productive conversations and seeking an outcome that’s fair for all. Nobody wants anyone to suffer more, financially, than they already have.
So, when negotiating with your tenant or landlord we have learnt:
- A problem shared is a problem halved. Talk to each other as early as you can and get the lines of communication open.
- Have the right mindset. Don’t enter or continue your negotiations with a desire to ‘win’. Winning at all costs is the very opposite of what we’d recommend in any negotiation.
- You need to understand the position of the other party and empathise with their situation.
- An occupied commercial property is the best result for both parties – that’s the outcome you both need to aim for.
- Document any agreements you make, so you both have a written record.
Part of having the right mindset relates to an increasingly popular term, which has become particularly prevalent during the COVID-19 crisis: ‘Commercial Karma’. What goes around comes around, and if you do right by someone, they will (usually) do the same back. This is a great mindset to have when negotiating. And if that doesn’t work, and no agreement can be reached, there’s always mediation. The Office of the Small Business Commissioner offers free assistance with disputes between businesses and landlords. But the best outcome is when it doesn’t have to come to that.