Despite an avalanche of information on managing commercial rent during COVID-19, tenancy advocates are receiving high volumes of inquiry from business owners flummoxed by the new government codes and guidelines. Along with landlords, tenants are needing help navigating the rules of this new playing field - and as per usual, the devil is in the detail.
Commercial tenancy advocate Mike Cunningham is among many specialists whose inquiry levels have soared. While government regulations put in place earlier this year (referred to in NSW as the Retail and Other Commercial Leases (COVID-19) Regulation, in Victoria as the Commercial Tenancy Relief Scheme and, in Queensland, as the Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020) have now been extended from September’s end till December 31, what some see as the states and territories kicking the can further down the pavement has failed to stem concern about the future.
This imagined future however is often not as grim as tenants believe says Mr Cunningham, a 20-year-plus veteran of tenant advocacy and CEO of advisory firm My Leasing Co. “Quite often we’ve had people in tears of relief after we restructure their lease,” he says. “Lately there’s been a number of business owners ready to hang up the boots and close down, and then we find a way forward so they can survive. As so many businesses are financially stretched, we get into their lease, find a way to take the weight off their shoulders and advise them on the direction they should be going in.”
At the end of the day minimising losses boils down to utilising not only the new leasing laws but existing ones as well says Mr Cunningham – as generally speaking most tenants are simply unaware they can negotiate far better lease agreements.
“Landlords have a lot of power over their tenants. They are able to stack the deck in their favour even more as they employ leasing agents to act on their behalf.
“What we do has tenant advocates however is organise better deals for both parties to create a win-win situation for tenants and landlords.”
Here is Mr Cunningham’s advice on 7 of the most-asked questions by tenants this year:
1. How much rent do I need to pay during lockdown while my sales are zero or close to it?
During COVID-19 rent is tied to the income of the business. “It’s not the best benchmark,” Mr Cunningham concedes, “but the way it’s calculated is on the income this month compared to the income the same month last year. This income needs to be down by 30 per cent in order for the tenant to receive the assistance. In Victoria under lockdown, zero sales equals zero rent. If they’re 70 per cent down they’re 70 per cent down in their rent in terms of how much they have to pay.”
He is not surprised tenants grapple with this issue as “when you read the legislation it is a bit tricky”. “What happens then is that you get a break on the rent for the percentage you’re down on your sales.”
2. How do the deferred rent payments work and do I need to pay these?
The next step is figuring out how much of the rent is written off by the landlord. “This is simply 50 per cent of the unpaid rent. The other 50 per cent of the unpaid rent is saved up to be paid by the tenant at a later date.”
“As for the unpaid rent, it accumulates. When Victoria comes out of lockdown and gets back on it feet the tenant will pay the full monthly rent as normal and then – over the course of two years - 1/24 of the unpaid rent per month.”
3. Can I get help working out what a fair rent adjustment could be to help me recover?
Absolutely – it’s a tenant advisor’s speciality. Mr Cunningham maintains that blindly renewing a lease can result in a tenant doing themselves a huge disservice.
One recent example resulted in saving a tenant hundreds of thousands of dollars in rent. “We were assisting a gym owner with their lease in regards to COVID but when we looked at his lease which was due for renewal in six months we found his rent was far too high – enough to send them broke over the course of a few years.
“In this case we talked to the landlord as well and helped them understand the tenant and the value of their asset and how if the current situation continued, they would lose their tenant and suffer the consequences of that scenario.
“In the end we negotiated a rental reduction for the tenant of well over $500,000 over 7 years.”
4. My landlords’ lawyer has sent me a long questionnaire with all sorts of financial questions relating to profit and expenses. How do I handle this?
Simple. You are under no obligation to answer this questionnaire, Mr Cunningham said. “You can provide evidence that you qualify for Jobkeeper and the sales information that you have used in completing your BAS. You can also have your accountant write a letter on your behalf setting this information out for your landlord.”
5. Can I get some help to negotiate and speak to the landlord on my behalf?
Yes. Most of the time it is sorely needed, Mr Cunningham says. “What we find is when we work through lease renewals is that tenants give away between 20 per cent and 50 per cent of the value that they should get to the landlord. This is simply because they don’t know what they don’t know.
“With a new negotiation for a tenant, we research the market to determine comparable rents and our starting point. Then we look for a cash contribution from the landlord as an incentive and a fit-out contribution to help our clients with their setup, and also a rent-free period. This way the tenant gets a high-quality tenant, a proper fit-out and value.
“When landlords understand what we’re trying to achieve and that it’s a commercial negotiation - not adversarial – they come on board. We’re looking for a great outcome for everyone– we just happen to represent our tenant.”
6. My landlord won’t communicate with me. What should I do?
Know that the pandemic is hitting landlords too and like tenants they too are investing time to understand how to work with the codes and how to respond to tenants. “Most important is to communicate in writing as this leaves as audit trail to prove you are acting with the best intentions,” Mr Cunningham says.
7. What do I do about any other future concerns?
Communication is key. “Communicate with your landlord,” Mr Cunningham says. “Restaurants and many of those in allied health industries are still constricted by space constraints. Where a hairdressing salon or beautician may have had 10 seats they’re only allowed to use every second one so they’re still impacted. A lot of businesses are still needing help and the landlord needs to make a commercial decision as to whether they help them out or turn the assistance off in which case they run the risk of the business closing.”