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Tips For Renegotiating Your Commercial Lease

Tips For Renegotiating Your Commercial Lease

Although the Western Australian economy has fared better than its Eastern-State counterparts during the COVID19 pandemic, it is still an uncertain time and we see that many of our business clients are staying vigilant and cautious.

In response to the COVID19 pandemic, the Western Australian government introduced the Commercial Tenancies (COVID-19 Response) Act 2020 (Act) and Commercial Tenancies (COVID-19) Response) Regulations 2020 (Regulations) to assist tenants in a ‘small commercial lease’. The Regulations contain the WA Code of Conduct.  The Act and Regulations provided much relief to tenants by prohibiting certain actions by landlords, such as the moratorium on enforcing lease security, prohibition on landlords terminating leases for certain breaches and a freeze on rent reviews.

For a majority of businesses, rental expenditure is a major expense and during the past 6 months, we have assisted parties negotiate temporary arrangements for their commercial and retail leases. In particular, we have seen rent relief being offered in the form of rent waivers or rent reductions.

The WA State Government has recently decided to extend the ‘emergency period’ under the Act until 28 March 2021. This could bring about another wave of lease renegotiations as some businesses and landlords had been preparing for the ‘emergency period’ to end on 28 September 2020.

In this article, we will discuss our experience of how parties could effectively renegotiate their lease.

Know your lease

The lease will specify the rights and obligations of the parties such as what constitutes a breach of the lease, termination rights, rights of the landlord to retake possession of the premise and the process the landlord must follow to exercise that right, the length of the lease, options to renew, when an option to renew must be exercised, rent review dates and rent review methods, make good obligations, etc.

Knowing your lease will allow you to better understand your options and associated costs. For example, if the lease is due for renewal, this could be a negotiating point between the parties. An experienced lawyer can review your lease and help you understand your obligations and rights under a lease and how to exercise them.

Know your financial position

Before re-negotiating a lease, it is imperative that you know your financial position and what your bottom line is. Things to consider are:

  • Are you eligible for government assistance such as JobKeeper?
  • How much has your revenue changed and what is your forecast?
  • What is your cash flow position?
  • Is your tax return up to date?
  • Have you provided security against the lease such as a bank guarantee?
  • If the lease ends, is there any other financial outlay such as fulfilling make good obligations?
  • If you were to commence a new lease, what is the initial outlay cost?

West Perth Legal has assisted clients in formulating their positions and have found that a case supported by good financial data is imperative. You also need to keep in mind that under the COVID19 laws, landlords have had to accommodate by providing rent relief. As such, any further relief needs to be supported by concrete data.

Acting in Good Faith in lease negotiation

Acting in good faith means being honest, transparent, and generally trying your best to reach a positive long-term outcome. Acting in good faith is important to ensure a positive negotiation experience.

We have seen parties who purposely refuse to pay rent citing negative financial impact due to the COVID19 pandemic even though their balance sheet says otherwise. This degrades the relationship and trust between landlord and tenant and does not help the tenant in the long term.

Address the interests of the parties in lease negotiation

A successful renegotiation of a lease needs to work for both sides. Both parties’ interests and needs should be heard and met. For example, from a landlord’s perspective, they may want to know if the tenant is serious about remaining in the premise in the long run and is doing everything it can to promote its business. From a tenant’s perspective, it may be helpful to know if the landlord is going to invest in upgrading the building or shopping centre and improve its presentation or if the landlord is going to re-develop the premises or sell it. West Perth Legal can help you document and communicate your interests effectively to the other party. In our experience, the other side is more likely to listen if they see that you have hired an expert to assist you communicate your position.

Documenting the deal

Once a deal has been struck, it is imperative that this is documented formally. West Perth Legal can document your agreement via a Deed of Variation or Amendment to the lease.

Contact Us for a Free Initial 15 Minute Telephone Consultation.