It's no secret to anyone in property that the commercial rental market is undergoing a huge shift.
While the government's new regulations and mandatory code have brought some certainty to landlords with smaller commercial tenants, those landlords with tenants who don't sit under the regulations have been left to wander in the quagmire of "good faith".
So what do you do if your tenant asks for rent relief? How do you negotiate in a way that leaves your tenant goodwill, revenue streams and cash reserves all intact?
This article sets out a roadmap to assist in navigating the rent relief conversation.
Step 1: The holding email
The humble holding email is the first port of call in demonstrating good faith.
A holding email lets your tenant know that they have been heard and gives you an opportunity to start a dialogue with your tenant.
Step 2: Check your closet for skeletons
Having all the facts is everything. If you come out playing hardball and your tenant realises that they have a month left on their lease, you will have an empty tenant roll very quickly.
The first thing to do is check all your leases to answer the following questions:
- How much of the term is left on the lease?
- If the lease has expired, what is the notice period on ending the holdover?
- Are there any break options?
- What security do you hold by way of bank guarantees, deposits and personal guarantees that you can rely on if the tenant walks and does not make good or goes under?
These questions will map the vulnerabilities in your lease portfolio, allowing you to be proactive in deciding where compromises need to be made and where you can take a firmer stance to protect your cash flow.
Step 3: Find out about your tenant
Lease negotiations are a lot easier if you know your opponent's cards. Don't be afraid to ask your tenant to see their books. If you can't get a hold of your tenant's books, you can get your information from the following sources:
- Company records – All listed companies are required to report material changes to their financial status publicly via ASX announcements. If your tenant is a listed entity, you or your lawyers can quickly check what changes have been made to your tenants' earnings guidance.
- Let the ATO do the work for you – If your tenant can show that they are receiving JobKeeper payments, then you can be certain that their turnover loss meets certain government criteria depending on the size of your tenant.
- Bring in an expert – You may even engage an expert to review the tenant's financial position. For example, Clayton Utz has access to an internal research service that can provide a report covering every aspect of a business, and has in-house forensic accountants who can take any books that you do have and rapidly give you a full financial picture of your tenant's affairs.
Step 4: Make your offer
The quantum of your offer will vary depending on your particular situation. While we enjoy a bird's eye view of the market as a whole, you are better placed than anyone else to understand your tenants, your cash flow structure and the peculiarities of your specific tenant market.
However, waiving rent is not the only tool available. The following options can also be useful when negotiating with a tenant:
Deferring rent
Benefits
- Preserves tenant's cash flow and generates goodwill.
Drawbacks
- Need to be certain that the future payments can be borne by the tenant.
- Puts pressure on the landlord's cash flow.
- Puts pressure on the tenant's cash flow when the deferral arrangement ceases.
Changing other terms of the lease to benefit the landlord (eg. make good obligations, demolition rights, additional guarantees)
Benefits
- Can help justify the impact of a rent reduction/deferral.
Drawbacks
- No immediate direct benefit to the tenant.
Extending the term of the lease
Benefits
- Gives the landlord greater security of tenure.
- Saves on re-letting expenses.
Drawbacks
- Puts pressure on the landlord's cash flow in the short term.
Absorbing the bank guarantee temporarily
Benefits
- Gives a cash flow sugar hit to the tenant for no upfront cost.
Drawbacks
- Reduces the landlord's level of security in the long term unless a top up bank guarantee is provided.
Rent waiver
Benefits
- Preserves and generates goodwill with the tenant.
Drawbacks
- Reduces income from the property.
- Puts pressure on the landlord's cash flow.
Before you send out your offer, you should also consider:
- An exit strategy – If you are proposing a rent waiver or deferral, don't leave it open ended. Make sure that you communicate what will trigger the end of the new terms. Will the terms end at your discretion? Or will they end after some set period, turnover improvement or removal of restrictions?
- Avoid being verballed – Make sure to be clear about what is and isn't a formal offer. Give yourself scope to negotiate further by including phrases such as "subject to internal approval".
- Be wary of turnover rent – While certain parties appear convinced that turnover rent is the way of the future, agreeing to turnover rent will leave you exposed to your tenant's market risk. Additionally, click and collect services have led to a steady decline in the share of earnings received by landlords. Be careful before agreeing to this as a method of payment.
Step 5: Contact us
Contact any of the Clayton Utz property experts listed below for expert advice on formalising your agreement or your negotiations.