If you are one of many retail business owners struggling in the current challenging retail environment, paying high rent could be exacerbating the situation. Many struggling retail tenants are attempting to renegotiate their leases or even considering selling up.

If this is the position you find yourself in, it is worth considering your lease options. Difficult times require a clear decision-making process. This article outlines this process, including how to:

  • assess your current situation;
  • compare your risks;
  • negotiate your lease; and 
  • decide your next move.

1. Assess Your Current Situation

The first practical task is to objectively assess your situation. To do so, you should consider:

  1. whether you have a personal guarantee on the lease.  This is important because your personal assets will be on the line if the personal guarantee is triggered, and this may change how you approach any negotiations with the landlord;
  2. whether the entity that signed the lease also operates other sites and has other assets.  This is important because the greater the company’s assets, the higher the chance that the landlord may sue for any losses it suffers.  If the company has no assets other than the business at hand, the threat to wind up is more credible;
  3. how long you have left on the lease and any other long term contracts (e.g. equipment leases).  This is important because the landlord could potentially refuse to terminate the lease and keep sending you invoices for the rent for the remaining term.  If you have a long term remaining, this problem is more complex; 
  4. whether this is an urgent situation requiring immediate action or an issue that you will be able to negotiate over several months. For example, you should consider whether your retail business is struggling but close to break-even or in crisis;
  5. how much your bank guarantee is (i.e. the security deposit your landlord may have required) and whether it will cover the amount of rent outstanding; and
  6. whether there is a franchise agreement, licence agreement or other long term third party agreement. If there is, you will need to consider how to cancel or renegotiate these arrangements.

2. Balance Risk

Next, you will need to consider the risks of leaving with your existing commitments. For example, it may make sense to continue trading if:

  • you have a long term lease with at least 3 years remaining;
  • you have a personal guarantee; and 
  • the company that signed the lease has other substantial assets, such as other profitable retail outlets.

This is because even if the business is struggling, continuing to trade or selling the business for a nominal price may be necessary to avoid the risks of a substantial claim from the landlord or finance company.  

However, if the lease has a relatively short period remaining, there is no personal guarantee and the company has no other assets,  you could potentially be more aggressive in your negotiations. In this situation, you may be able to terminate the lease and walk away with minimal personal risk. While you may face the loss of your bank guarantee and investments (e.g. the fit-out), you may be able to avoid other consequences, such as the landlord or finance company taking action against you personally.

This also shows how important it is to set up your business with the right structure. If your business faces a crisis and you need to consider exit options, the right structure can protect you from legal action against you personally. You should treat corporate structuring very seriously and avoid personal guarantees from the outset of your business’ lifecycle. 

3. Negotiate Hard

Once you have assessed your legal position and potential liabilities, you should contact the landlord as soon as possible and alert them that you are struggling. There is no point in hiding the crisis and trying to pay rent if the business is unsustainable.

Before calling your landlord, consider any mitigating circumstances that may help your case for requesting reduced rent. 

For example, the landlord may have failed to undertake building works (such as electricity or plumbing) that you ended up completing. Or perhaps the landlord stated that your location was a ‘premium site with a great history’, but you later learned that multiple businesses had failed in the same location.

Such issues could be justification for reduced rent, and now is the time to raise them. However, these kinds of claims require very careful legal analysis. Do not raise them without reasonable grounds.

4. Make a Decision

If the landlord treats the threat of you leaving seriously and negotiates some kind of rent reduction or suspension, make sure that your agreement is in writing. There should also be a deed of variation or other documentation to record the new arrangement.  A verbal discussion can often lead to confusion between the parties.  

For example, you might believe the deal involves a rent waiver, whilst the landlord might believe you have agreed to a temporary rent suspension, with the outstanding amount to be eventually paid back.  A written document will avoid any such confusion.

If the landlord does not respond to your request, you may need to make a difficult decision. Importantly, you should make this decision before you run out of funds.

By continuing to pay rent to the landlord, you may end up in trouble with the tax office.

It is better to leave with a fighting fund to combat any claim from the landlord than to continue sustaining significant losses and later make a crisis decision with little or no money left

5. How Coronavirus Impacts Lease Negotiations

It is important to note that the COVID-19 crisis has changed the legal framework around retail lease negotiations.

There are now various government codes and policies in place both nationally and at the state level. These policies provide guidelines regarding rental moratoriums and suspending evictions for commercial tenants. Although none of these codes or guidelines requires landlords to give you a complete waiver of rent, they do require landlords to reduce rent in proportion to the drop in sales.

There is also a six-month moratorium on evictions. You should make yourself aware of these new guidelines and use them in your negotiations with the landlord. You will need to proactively contact your landlord to seek a rent reduction. It is important to note that you may need to provide financial information to support your argument that sales have declined.

If you cannot pay any rent at all, you should obtain legal advice regarding whether any force majeure-type argument  (i.e. for circumstances outside your control) can be raised in the context. This will critically depend on the terms of your lease, and it will be important to obtain professional advice to better understand the implications of using this argument.

Although by no means a certain argument, at least this kind of argument may allow you to:

  • negotiate to terminate the lease; and 
  • cease your obligation to pay rent, although of course you may need to give up possession of the premises as well.

What if the Landlord Threatens to Terminate My Lease After The COVID-19 Crisis is Over?

You should seek long term rent reductions with your landlord to make your situation sustainable.  Continuing to trade and explore sale options (or other exit options) whilst not paying rent is obviously a very difficult option to maintain for any significant period of time after this crisis has passed.

 If you cannot reach agreement on long term reductions, the landlord will likely issue a breach notice at some point if agreement cannot be reached after the termination moratorium is over. Depending on your lease and the legislation in your state or territory, you may have only seven or 14 days to rectify the breach. 

You should have reasonable bargaining power to negotiate a sustainable rent given the landlord may have few options even after the crisis to obtain alternative tenants.  However some tenants may face aggressive landlords who will push for a return to full rent once the crisis has passed.

Worst Case Scenario

If the worst case does look like happening you do not want to end up locked out of your lease with your equipment and personal assets inside. When this happens, the tenant’s assets are often ‘held hostage’ until you reach some kind of settlement.

There are legal ways to access your assets and the landlord should give you the opportunity to remove your assets and personal items. However, your landlord should not terminate your lease without warning. If you know that your landlord is going to terminate your lease, you should remove your valuable assets out of the store in an orderly fashion as soon as possible. 

Depending on your lease, it is generally not necessary to inform your landlord which assets are entering and exiting the premises. If you are locked out or terminated, you should get legal advice to:

  • assess your options; and 
  • consider whether you need to make a formal claim to get access to your assets. 

Key Takeaways

If your retail business is struggling, you should obtain legal advice regarding your options as soon as possible. This will allow you to take considered action at the earliest possible time. If you find yourself in this situation, you should:

  1. assess your current situation;
  2. compare your risks;
  3. negotiate proactively using the new legislative environment to your advantage; and
  4. decide your next move if the landlord does not agree (particularly if this occurs once the moratorium on lease terminations has ceased).

Many people keep their heads in the sand when a business becomes loss-making. However, this only results in a delay in addressing the problems and may deepen the losses you face. If you need help with your retail lease, contact LegalVision’s leasing lawyers on 1300 544 755.

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