COVID-19 and Commercial Leasing

COVID-19 and Commercial Leasing, protecting your bottom line

Whilst we know that the Mandatory Code of Conduct (“the code”) was put in place to assist with good faith negotiations it is essential for tenants of Commercial Property to consider alternative solutions where possible when considering their future business needs and to mitigate as much risk as possible when bouncing back from the pandemic.

Once it has been determined that a tenant meets the required criteria outlined in the code defined by their eligibility for the Commonwealth Government’s JobKeeper programme, with an annual turnover of $50 million or less, a Landlord should then provide a qualifying tenant with cash flow relief in proportion to the loss of turnover they have experienced from the COVID-19 crisis. For example, 60% loss in turnover would result in a guaranteed 60% cash flow relief. At a minimum, half is provided as rent-free period/rent waiver for the proportion of which the qualifying tenant’s revenue has fallen.

The other half could be through a deferral of rent, with this to be recouped over at least 24 months in a manner that is negotiated by the parties.

This is where a tenant needs to think about their future needs, deferring 50% of the cash flow relief will inevitably increase a tenants rental over the remainder of their Lease term, for example, IQ Research has been granted a cash flow relief of $150,000, so 50% of this would equate to $75,000 which is to be deferred or spread evenly over the remainder of the term being three years, their increase in rental would look something like this:

·      IQ Research’s current rental is $450 sqm Gross over a 600 sqm tenancy

·      They have three years remaining on their Lease

·      If we amortise the $75,000 over three years their sqm rental increases to approx. $491.66sqm plus any reviews or increases

·      IQ Research now has to consider the impact of this increase to their business as it may take some time to start generating revenue again

An alternate solution could be:

·      Rather than accepting the COVID-19 cash flow relief and increasing their rental, IQ Research decides to approach their Landlord with the offer of an additional three years tenure to be added to the existing Lease extending the Lease term to six years as a simple variation of the Lease

·      IQ Research also requests an incentive from the Landlord based on this additional Lease term in the form of a rent-free period, thus not increasing their rental as above but decreasing it whilst also reducing their overheads for a longer period of time to assist whilst they start to reopen their business again

·      This solution suits both IQ Research and the Landlord as the office location and size of the tenancy is perfect for IQ Research, so they know that that they want to remain there long term. The Landlord is not going to lose IQ Research as a tenant, they are securing a longer Lease term and have avoided having to pay for any marketing or holding costs to Lease the tenancy again in the near future

The best way to achieve the most cost-effective outcome is to keep the discussions amicable and understand that two parties are involved in the discussion that have both been impacted by COVID-19.

Keep an eye out for more Skillify COVID-19 related tips