Posted on Friday, March 27th, 2020 in by Matt Garmony
The COVID-19 global pandemic is rapidly affecting the retail and commercial property markets providing uncertainty to both Landlords and Tenants, their business and rental income/payments and their leasing arrangements. COVID-19 is likely to result in leases, market reviews and rental relief to be negotiated between Landlords and Tenants. There is often a minefield of legal and contractual clauses in leases which take into account unforeseen circumstance or force majeure events or common law concepts of ‘Frustration’ which can sometimes release parties from certain obligations. This requires advice from a suitably qualified property lawyer.
Often Landlords rely on rental payments to cover the cost of the property (outgoings, including rates and taxes), payment of mortgages or as an income source. Likewise for Tenants, rent is often one of the major expenses for a business leasing a premise.
The payment of rent is a material term of a lease agreement and failure to pay the rent generally grants Landlords the right to terminate the lease and re-enter the premise after the relevant notice period. However in our opinion, Landlords need to be mindful of the financial effects of terminating a lease and the premise becoming vacant.
Landlords perspective
Not only will the Landlord receive no rental income, they will have no one covering the cost of the property’s outgoings. In these uncertain times, we are of the opinion there may be a limited number of businesses looking to enter into a new lease agreement (there may be a few exceptions) and therefore it is likely that the premise will remain vacant until the COVID-19 Pandemic is over and also during the leasing up period after the pandemic. In addition to this, there will be a leasing fee and advertising costs paid to a real estate agent, the landlord may have to grant an incoming tenant a leasing incentive by way of a rent free incentive and may also have to undertake some capital works or refurbish the premise to entice new tenants. All this comes at a cost to the Landlord which can often add up to over a years rental income.
Tenants perspective
A tenant’s premise and lease tenure, often adds value to the tenants business, particularly for locational specific businesses. Often tenants spend a significant amount on fitout, which is likely amortised over the term of the lease. Location reliant and local customer focused businesses rely on repeat customers, reputation and word of mouth, which often takes time to build up. Therefore it is often important for tenants to stay in the same location in order to maintain their customer support and patronage which adds value to their business.
What options do Landlord and Tenants have?
We are of the opinion, it may be in both parties’ best interest not to terminate the lease and instead enter into a written agreement for rent abatements or rental reductions during the COVID-19 pandemic. Our Licensed Valuers have prepared numerous market rental valuations and have provided property consultancy advice to both landlords and tenants regarding rental agreements and can assist parties in these extraordinary circumstances to achieve a beneficial outcome to both.
Industry recommendations & Media reports
The API reported on 27 March 2020 that “The Shopping Centre Council of Australia (SCCA) which represents the nation’s largest retail property landlords has asked members not to terminate leases because their tenants cannot make rental payments. In a statement, SCCA chairman Peter Allen, who is also the CEO of Scentre Group, said it has asked members to ensure there are no lease terminations for non-payment of rent for small to medium sized businesses as we work through this period.”
Billionaire Solomon Lew, who owns Premier Investments, which includes brands such as The Just Group, Smiggles, Portmans, Just Jeans, Peter Alexander, Jay Jays, Jacui-E and Dotti, is closing his 900 stores across Australia and has advised they will not pay rent during the shutdown. The API explained that Premier said in a statement “These extraordinary circumstances mean Premier intends not to pay any rent globally for the duration of the shutdown.”
We are of the opinion tenants also need to be mindful of Landlords financial obligations during this period and a negotiated outcome should be attempted to be reached.
In a separate article on 27 March 2020, API has reported it is understood that Premier has “close to 70% of stores already in holdover (expired leases) or with leases expiring in 2020 providing the group with maximum flexibility.”
Deloitte Restructuring Services partners Vaughan Strawbridge, who is one of the appointed administrators of fashion business Colette by Colette Hayman said “These are extraordinary times, and there is also no certainty that many retail operators in Australia will be able to continue trading amidst so much uncertainty and with public health measures changing so frequently.”
The Australian Financial Review reported on 26 March “Rental property owners would be given tax relief by the federal government in return for waiving or reducing rents, under one option being considered by the Morrison government.” In this continuing evolving (often daily) economic environment, both landlords and tenants should discuss the government grants and subsidies that are being implemented by the state and federal governments during these uncertain times with their accountant or financial advisors.
Licensed Valuers assistance
COVID-19 is likely to result in leases, market reviews and rental relief to be negotiated between Landlords and Tenants. The licensed valuers at Garmony Property Consultants have the knowledge and experience to assist you with commercial and retail market rental valuations and provide you with consultancy advice. Our professional valuation reports provide the reader with a clear and concise understanding of exactly how and why the valuer has arrived at the market rental which is supported by relevant comparable rental evidence and methodologies. Please call us and speak to one of our licensed valuers to see if we can assist with any rental dispute or matter.