The last three months have caused large numbers of tenants to worry about their business’ future and therefore their commercial lease status. Under laws introduced during the pandemic, “impacted lessees” – those who either quality for the federal government’s Jobkeeper scheme or had a turnover last financial year of less than $50 million- and their landlords are advised to strike agreements over rental reductions. Lessees cannot simply walk away (and landlords cannot turf out their tenants).
As a result, lawyers are fielding calls from concerned lessees on the range of options available: should they stay or should they go? What is the best way to negotiate a better rental deal? Reducing a footprint is another option but doing so must be done carefully and skilfully. Last but not least, walking away from a lease is another option and should it be available, it will involve some key considerations.
“Given that rent forms a major part of our cost of doing business, and our commercial tenancy, in many cases, identifies who we are as a business, we are clearly at a cross road in the history of the commercial tenancy scene,” said Andrew Grima, principal lawyer head of property for Coleman Greig lawyers.
Designing a sublease
Although restrictions are easing in many regions, large numbers of employees are continuing to work from home either full or part time. Mr Grima is one of them, working three days a week in his local office close to home and two days a week from home. “This situation is no doubt replicated thousands of times over throughout our economy,” he said. “One of the most popular solutions I’m seeing is businesses wanting to offer all or part of their tenancy to another business through a sublease or licence.”
In a perfect world for those who simply cannot or do not wish to pay rent, another business would materialise and take over a premises with minimum change required. The next best thing could be subletting by installing temporary partitions, or subleasing office space and meeting rooms in another way of helping pay the rent.
As tempting as the options above are they do however depend on the fine print embodied in a lease. Tenants must check to the letter what they are permitted to do under the pre-COVID-19 agreement they signed with their landlord. Subleasing may or may not be permitted, or permitted only for a specific part of the premises. Also important are the requirements for consent by your landlord for subletting. “Another factor tenants must consider is that any such arrangement will not nullify their obligations under their lease for the whole of the footprint, so if a subtenant or licensee is in default the buck stops with them,” Mr Grima said.
Passing the baton
Assigning a lease to another party is the ideal way to effectively say “here I can’t do this right now, you look after it”. In a perfect world a tenant would appear who was agreeable to inheriting your obligations and remaining term. This however is highly unlikely. An incoming tenant would probably desire a longer term and may not want anything to do with some or all of your obligations.
As with subletting, refer to the fine print in the lease relating to any conditions of ‘consent to assignment’. A landlord will generally request information to assess the quality of a potential assignee. They may require additional security, most likely a cash deposit in this economic climate, or a bank or personal guarantee from the newcomer.
Mr Grima said he always advised tenants to determine whether they and their guarantors will be released should an assignment occur. “They also need to find out whether an assignment could trigger a call back of any incentive they’ve been given under a lease,” Mr Grima said.
Waving the White Flag
Being granted the chance to surrender a lease early may well be the perfect option for many during this COVID era. Unfortunately, there would be few tenants able to organise a situation where they can walk away from all future obligations.
There will however be cases in which landlord and tenants do choose to go down this path. “The starting point for the landlord is to request a payment based on the rent payable for the remainder of the term, re-letting costs and make good,” Mr Grima said.
“It is then up to the tenant to factor in the likelihood of the landlord securing another tenant and therefore reducing this payment to the extent of the likely rent they will receive from any incoming tenant. This is not an easy exercise but it may well be that another tenant is seeking the footprint they are leasing and that rather than an assignment, they are prepared to enter into a new lease which necessitates surrender.”
In this case, Mr Grima said the tenant wishing to surrender their lease may still need to pay a surrender payment. “This is to factor in any future make good costs and a shortfall in rent the landlord is now receiving - especially in a falling market. Each case will differ and in the end it will boil down to a commercial negotiation.”