With the introduction of emergency measures around the world resulting in countries going into self isolation or lockdown to prevent the community transmission of Covid-19, business owners / managers are grappling with a new business reality and heightened uncertainty.
The immediate focus for business owners / managers is looking after staff and cashflow.
As part of the tough decisions being made around cashflow, to ensure business survival, you may want to consider having a conversation with your landlords around deferring or restructuring rental payments.
Property costs are generally the 2nd or 3rd largest cost to a business behind staff costs.
Your obligations to pay rent for your premises is governed by your lease which is a legally binding contract. Your first step should be to review your lease terms to determine what your options are. You can’t unilaterally break or vary your lease terms without reaching agreement with your landlord.
Lease Options to Consider
Rent Abatement – Your leases may contain a rent abatement clause. In New Zealand many of our leases are on an Auckland District Law Society (ADLS) lease template. The ADLS 6th edition 2012 was amended (see cl 27.5) following the Christchurch earthquakes to provide for a “fair proportion of rent and outgoings to cease” in the event you cannot access your premises in an emergency.
What is a fair proportion of rent and outgoings to abate? This will be a matter of negotiation between you and your landlords. Market evidence as to what is a fair proportion is currently being developed as we speak. One fact to remember is that your premises are not empty and the landlord is storing your fixtures, fittings and chattels even if you can’t access your premises. From a landlord’s perspective, this warrants some rent to be paid.
In my dealings with clients, we have achieved outcomes where landlords have granted tenants a month’s free rent and some have rebated rent by 40%-60% for the month. I would be interested to hear what outcomes you have achieved.
Some landlords have qualified the rent abatement clause to only being available to tenants if the landlord can claim on their Loss of Rents / Business Disruption insurance cover.
A key difference to the Christchurch earthquakes scenario where landlords did grant rent abatement when there was no specific clause in the lease, is that landlords could claim on their insurance cover due to earthquake property damage. With Covid-19 there has been no property damage. Therefore landlords are unlikely to successfully claim on their Loss of Rents / Business Disruption insurance cover.
Force Majeure – your lease may contain a force majeure clause which essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties arises, such as a virus.
Where your lease does not provide for rent abatement or force majeure
Consider whether the doctrine of frustration may apply to your lease. The doctrine of frustration is a contract law doctrine that sets aside contracts where an unforeseen event either renders contractual obligations impossible, or radically changes the party’s principal purpose for entering into the contract. However, you probably don’t want to cancel the lease, merely renegotiate rental. This is a legal argument that you will want to discuss with your legal advisors.
Negotiate a Rent Deferral – discuss with your landlord deferring the payment of rental during the lockdown and paying the deferred rental over the balance over the lease term.
Negotiate a lease restructure – discuss with your landlord deferring rent or reducing rent in exchange for extending your lease term, exercising your right of renewal, pre agreeing to the next rent review.
This is likely to be a give and take conversation. Remember your leasing arrangements are a long term relationship and both parties need to benefit from a concession now. It is in both your and your landlord’s interests that your business survives and prospers when the sun sets on Covid-19.
Be kind to your landlord
We are all in this together and we simply can’t pass our cashflow issues onto our landlords. We must remember that our landlords are also facing the same cashflow issues as their tenants.
Landlords may be able to defer and capitalise their interest payments but they will still need to be made at a future date.
When the lockdown lifts and the economy recovers, you are still going to need to deal with your landlord so it is important to maintain rather than burn the relationship.
That is why it is important to talk to your landlord and agree a solution.
It is interesting to note that our Australian cousins are proposing a leasing code of conduct between landlords and tenants in a shared commitment to business continuity. In New Zealand the Property Council of New Zealand is raising the issue of Government assistance for landlords when tenants simply stop paying the rent.
Creating certainty in an uncertain world
When negotiating with your landlords to arrive at a solution I believe it is important to create certainty.
As a tenant you want certainty as to what your obligations are over the next month and the next 3-6 months as we come out of (and possibly back into) lockdown. Your landlords want certainty over what rental they are going to receive over the next 6 months. Your landlord’s bankers want certainty over the mortgage security and interest payments based on your lease commitments.
The negotiation with your landlord may need to be in tripartite with both your landlord and their banker, so that the tenant, the landlord, and the bank can align cashflow certainty.
Now is a time to think laterally and initiate a (virtual) conversation with your landlord. I am happy to assist and advise you in this process.