Asking for a rent reduction
The reality is, both landlords and tenants are being affected by COVID-19 and the government’s imposed restrictions on social distancing and trading. This looks like continuing for some time.
When a tenant asks for a rent reduction, they could be causing financial stress for their landlord. On the other hand, if a landlord refuses to reduce the rent for a tenant under financial stress, they risk permanently losing a great tenant and will probably have difficulty finding a replacement.
Like all things COVID related, we’re in this together so it’s important for landlords and tenants to negotiate so they can find an amicable middle ground. Often legal representation is beneficial to assist with the negotiations in a logical and commercial manner.
To obtain a rent reduction, tenants need to show a reduction in revenue because of the Covid-19 pandemic. Once that is proved, landlords are obliged to provide a proportional reduction in rent in the form of a rental waiver and/or a deferral of rent.
For example, if a tenant pays $4,000 p/m in rent and can demonstrate they have suffered a 50% reduction in revenue due to the impact of COVID-19, they can ask their landlord for a 50% rental reduction. (In this example, the rental reduction would be $2000 per month.) Rental waivers must form at least 50% of the total rent reduction (i.e. $1000 per month in this example) with the balance comprising a rental deferral.
A rental deferral simply means the tenant and landlord enter into an agreement about how long the deferral period will last. This period must be at least 24 months, unless the parties agreed otherwise. The agreement will also specify how the deferred rent will be repaid (usually as regular instalments over the deferral period).
In certain situations, a commercial tenant may be able to demonstrate that repaying the deferred rent would compromise their ability to fulfill their ongoing obligations under the lease agreement. If this occurs, the tenant may ask the landlord to waive more than the minimum 50% waiver of the total rental reduction. However, this will be subject to the landlord’s financial ability to provide such additional waivers.
Asking for a lease to be terminated
In very particular circumstances, commercial leases can be terminated. A common ground is due to “force majeure” which includes events such as “acts of God”, “natural disasters”, “acts of war and national emergency”. Not all leases contain this clause and even if your lease does, your ability to use COVID-19 as a reason to terminate your lease will depend on the way the clause is worded.
Terminating a lease due to force majeure can be instigated by either a commercial landlord or a business tenant.
If a commercial lease doesn’t have a force majeure clause, it is possible to terminate the lease due to “frustration of contract”. In light of COVID-19, frustration of contract might be a ground for terminating the lease if the pandemic has caused a radical change of circumstances beyond the parties’ control which was not contemplated by either party (landlord or tenant). The change of circumstances would need to be sufficiently significant that it would deprive either or both parties of the benefits intended under the lease.
Terminating a lease due to frustration of contract is extremely risky and can be costly so it’s essential to obtain good legal advice before attempting to terminate a commercial lease on this basis.
“Don’t try this at home!”
Commercial leases are contractual agreements between 2 parties – the landlords and the tenants. They are extremely complex so you should always seek sound legal advice before entering into a commercial lease. It’s the same when negotiating a rental waiver, rental deferment or when attempting to terminate a lease.
Christopher Nakamura, principal and founder of Egis Legal, works with small and medium sized businesses to provide plain English legal advice with commercially sound and practical outcomes. As a former stand-up comedian, conversations with Christopher are punctuated with good humour as well as sound legal advice.
If you are a commercial landlord or business tenant experiencing problems with a commercial lease, get in touch with Christopher by calling 02 8005 6577 or complete the online enquiry form here.
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