Many cafe and restaurant owners are facing an unexpected situation: their sales have dropped so dramatically that they are unable to pay the rent. Negotiation with the landlord is essential for survival, and it should be commenced as soon as possible.
To get the best result, professional help is very important, and the cost will be far less than the loss you could face if you do nothing. Let's look at the legal issues involved, and how to work with a lawyer to get the best result.
What is a lease? A lease is an exclusive right to occupy the premises to the exclusion of all others including the landlord subject to the terms of the lease. Compare this with a ‘licence’, which grants a non-exclusive right to the premises (eg coffee cart in a building foyer).
Mandatory Code of Conduct
The Federal Government has now introduced a Mandatory Code of Conduct to impose a set of good-faith leasing principles for application to commercial tenancies (including retail, office and industrial) between owners/operators/other landlords and tenants.
The Code of Conduct applies to commercial tenancies where the business:
- has turnover of less than $50M per annum; and
- is eligible for the JobKeeper payment
The code includes a common set of 14 principles. These include that:
- landlords must not terminate leases for non-payment of rent during the COVID-19 pandemic (or reasonable recovery period)
- tenants must stay committed to their lease terms (subject to amendments)
- landlords must (yes, must) offer reductions in rent as waivers (no requirement to repay) or deferrals (more time to pay)) based on the tenant’s reduction in trade during COVID-19
Even if the legislation hasn’t been formally passed by a State government, get in touch with your landlord, the agent or centre management and get the process started.
Prepare to Negotiate
Come with a proposal which is capable of acceptance. Don’t make the landlord do the work.
If the landlord doesn’t strike a deal, what will be the outcome for them?
- Terminating the lease for default, and seeking payment from the tenant and any guarantor. Entitled to sue for (effectively) rent until the end of the current term. They're unlikely to recover anything – because of the tenant's asset protection strategies or they just have no money outside the business anyway.
- Premises is vacant until there’s someone keen enough to come in and start up again. Given the uncertainty, this would seem to be unlikely until a vaccine is widely available. They will receive no rent for that period either.
What the landlord could offer:
- Grant no relief (leave things the same)
- Offer some rent relief (whether percentage reduction or a different amount)
- Change to turnover rent or percentage rent (a portion of actual sales)
- Tenant to pay outgoings only (no rent, but the land is at no cost to the landlord) - possibly a good middle ground.
- Tenant to pay nothing
- Tenant to pay nothing and permitted to close the doors
Any rent relief now may be required to be paid back over time. It is absolutely worth pushing back against that, as you would need to double your revenue to pay the double rent, or have it be paid out at the end of your lease.
A different option is to surrender the lease. This will cause the lease (and the obligation to pay rent) to come to an end. There won’t be a business to sell. Commonly, the tenant will need to pay the landlord in consideration of the surrender.
Make the best use of a lawyer and keep your costs down
First, why send in a lawyer or lease negotiator?
- They are a filter to remove the (permitted) emotion and the irrelevant information.
- Leases are long, complex documents (10+ pages) with lots of jargon you won't understand.
- Lawyers are trusted to give accurate and relevant information.
- The landlord will be using a lawyer, so you need to have equal strength in the negotiation
- Lawyers have done this many times before!
Have all the facts and documents available and up to date. Without these, the lawyer will have to spend time putting them together, and will likely charge you for it. Information needed:
- Copy of the Lease
- Rent payable
- Outgoings payable
- Current arrears
- Term left on your current lease
- Identity of the tenant - are you a corporation, corporate trustee, an individual or a group of individuals?
- Guarantors and their assets
- Sales, Profit & Loss Statement and Balance Sheet up to date. Turnover numbers are the essential part of the Code of Conduct.
- You know the landlords as people better than the lawyer, so let them know what they are like. It guides the legal strategy.
Top negotiation tips from an experienced lawyer:
- Know your position under the lease – and be humble about it. You signed the document, even if the times were very different.
- Send in the lawyer – you will immediately gain more respect and start to get faster replies to phone calls and emails.
- Present a solution – don’t make the landlord do all the work.
- Shopping Centre managers are often subject to corporate guidelines and may have limited room for negotiation. If you’re being stonewalled, move the negotiations to emails. Put a brief, clear, readily acceptable offer in writing so they can forward on to higher decision makers.
- Don’t take the first NO as the final answer, it might be just the opening move in the chess game!
- Try and avoid providing personal assets and liabilities, unless there’s nothing there, and even then, maybe. Some landlords will want you to sell down your assets, or may seek charges over property. Business Profit & Loss Statement should be provided, but accompanied by the most recent data showing the immediate losses. Use figures to make an objective case. Because of the Code of Conduct, the principally relevant information is sales, and sales only. Consider pushing back is anything else is requested.
- Don’t get hung up on ‘force majeure’ or ‘frustration’ without specific legal guidance. They are tricky beasts and need to be considered on a case by case basis – particularly if the landlord isn’t willing to negotiate an outcome.
- Try to understand the landlord’s financial position – do they have a mortgage, and need the rent for their repayments? If so, are they making use of mortgage payment relief available during the Coronavirus emergency? Are they retirees, and the rent is their superannuation?
- Know when to fold ‘em – just like the poker player, know when it’s time to accept the deal, or walk away.
Author: Richard Edwards, Head of Commercial at Pragma.Law
firstname.lastname@example.org ph. +61 (8) 6188 3330
Commercial Landlord & Tenant Govt. Mediation Services:
NSW ... Victoria ... Queensland ... South Australia ... Western Australia ... Tasmnia ... Northern Territory
There are regulated and non-regulated leases. Regulated leases are those under the commercial retail leasing legislation in these states:
ACT: Leases (Commercial and Retail) Act 2001
NSW: Retail Leases Act 1994
NT: Business Tenancies (Fair Dealings) Act 2003
QLD: Retail Shop Leases Act 1994
SA: Retail and Commercial Leases Act 1995
Tas: Fair Trading (Code of Practice for Retail Tenancies) Regulations 1998
Vic: Retail Leases Act 2003
WA: Commercial Tenancy (Retail Shops) Agreements Act 1985
These Acts provide certain protections to tenants and vary State to State. Most shopping centre leases are regulated.
Disclaimer: This communication provides general information which is current at the time of delivery of the communication. It does not constitute advice to you and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. SilverChef and Pragma Lawyers disclaims all responsibility and liability (including, without limitation, for any direct or indirect or consequential costs, loss or damage or loss of profits) arising from anything done or omitted to be done by any party in reliance, whether wholly or partially, on any of the information. Any party that relies on the information does so at their own risk.