They’ve been released to ease the burden on business owners hit hard by the pandemic, offering significant reductions in rent and other financial advantages. The thing is, you’ll need to negotiate with your landlord or agent to make the most of them - and we know that isn’t everyone’s cup of tea.
Never fear! Today we’re furnishing you with facts and confidence, sharing four easy steps to a successful commercial lease re-negotiation; one that takes the pressure off, and keeps your business running.
What’s the context?
Before we dive into effective negotiation, here’s a little context.
The National Cabinet Mandatory Code of Conduct SME Commercial Leasing Principles During COVID-19 (the “Code”) was released on 7 April 2020, giving commercial tenants like you room to negotiate amendments, in good faith, to your existing lease.
Successful negotiations begin before a word has been exchanged.
Start by pulling together your paperwork and taking the time to understand your financial position. How much business have you lost (or anticipate losing) due to COVID-19? Are you eligible for Government support? Are your tax returns up to date? Having a handle on the numbers in advance (know your revenue, expenses and profitability) will streamline the process.
Next, know what’s on offer.
Under the Code, landlords are required to offer you a reduction in rent proportionate to your loss of trade. So, if you’ve lost 70% of your turnover, you are, as a starting point, entitled to a 70% reduction in rent. That reduction will be in the form of waivers (this means you never pay) and deferrals (which you pay off over a period of two or more years). Whatever percentage rent reduction you agree to, at least half must be waived.
It’s good to understand the baseline positions of the Code so you know the minimum of what you’re entitled to. (Bear in mind that the principles under the Code are “good faith” principles, so are also subject to the landlord’s ability to accommodate. It works both ways.)
In addition to guidelines around rent, the Code also states that your landlord cannot enforce minimum trading hours, apply levies or charges if you choose to reduce trading hours; they must freeze rent increases and provide you with an opportunity to extend your lease on the same terms, giving you time to recover.
And finally, take the opportunity to think about (and bring to the table) other important elements of the lease, such as: When is the next rental increase under the lease? How is the next rental increase (after the COVID-19 period expires) calculated? Who is responsible for outgoings during this period? (The Code requires landlords to pass on any relief they receive). Who is paying the cost of registering the variations to the Lease (if necessary)?
Answering these questions together with your landlord or agent will save headaches later.
In any negotiation, it’s crucial to understand the other side’s motivations. What does your landlord need or want?
Are they looking to sell the premises? Is it short-term cash flow they’re after? Would an extension of the term be of interest to them?
Knowing the answers to these questions can help you leverage your position. If your landlord is represented by an agent, the agent can be a source of this information. Simply give them a call.
And here’s another tip: when entering a commercial lease negotiation, don’t assume you’re on the back foot. You, too, can occupy a position of power by understanding the benefits you confer to your landlord.
If your landlord is looking to sell or is in need of short-term cash flow, the risk of you winding up your lease and leaving them with a vacant space may be a worrying prospect, incentivising their assistance in the survival of your business.
Have this knowledge in your pocket and use it to not only prop your confidence, but your requests too.
Remember: this is a commercial negotiation. Both you and your landlord have a vested interest in closing the deal - in a way that works (financially, and otherwise).
So, now that you have an idea of the landlord’s needs or wants, you can negotiate by focussing on yours and the landlord’s interests – rather than positions. What do we mean by this?
Negotiating from a position might look like this:
You: “I’m currently paying $10,000 per month in rent. With a 70% reduction in turnover, I demand that my rent be reduced by $7,000 per month – to $3,000. I refuse to pay a dollar more, because that’s what I am entitled to under the Code.”
Landlord: “That’s 4.2 months’ worth of free rent! Unreasonable! I have bills to pay and can’t afford to receive anything less than $9,000 per month.”
In this situation, it’s far too easy to arrive at an irreconcilable conflict. Dead end.
On the other hand, if you negotiate based on interests, the process might unfold like this:
You: “My business has experienced a significant reduction in turnover: 70%! I want to keep my employees employed, the business running, and do everything I can to make it through the pandemic.”
Landlord: “The thing is, I have a number of investment properties and all my tenants are trying to negotiate rent reductions - plus other business interests that are losing money. I need the short term cash flow to prop up those businesses.”
You: “Well, I have a small sum of cash [set aside for BAS, PAYG, security – insert as appropriate]. What if I continued to pay the full amount of rent for six months to help you with your short term cash flow, and you give me a rent-free period of 6 months after that?”
Landlord: “That works for me. I can access the short-term cash flow I need, while being able to offer you a reduction in rent – simply deferred. I am happy to give you the additional 1.8 months’ worth of rent reduction for the benefit of the cash flow upfront.”
With this slight tactical shift, you can reach a mutually-beneficial agreement with your landlord based on respect for - and fulfilment of - each other’s interests. In fact, in this situation, you end up getting 6 months’ rent reduction for deferring your rent reduction. A true win-win.
Don’t get stuck on positions. Focus on interests instead.
4. Closing The Deal
So, you’ve had The Talk, arrived at a mutually-acceptable arrangement, and feel a warm sense of relief. But remember to get that agreement down on paper!
You’ll need a formal amendment to the lease to solidify the outcome of your negotiations and cement new commercial lease conditions. This will usually include:
- A Deed of Amendment or Deed of Variation which sets out exactly how the terms of the lease are changed, when they kick in, when they end.
- If necessary, registration of the amendment.
Always have a savvy lawyer run their eyes over the Deed.