Commercial tenants in arrears? What is the best course of action?
A lease surrender might seem like the last resort, but here is why it might not be the worst idea to consider.
Current economic conditions show trading performances across commercial market sectors with varied impacts – positive and negative. The high levels of voluntary administrations and subsequent insolvencies suggest that for many, the headwinds have taken their toll.
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Some lessees have survived on degrees of respite carried over from the past couple of years, and some simply struggle in the climate of high inflation and difficult employment. Often the deferral of rent probably translates to deferral of the inevitable.
For lessors too, the conditions can be tough, with many experiencing a degree of mortgage stress in the higher capital cost cycle, and often significant reduction in their cash flow.
Pick your cliche, but the essence remains for landlord and lessee alike, that it is not easy to accept these realities but often better to get the right advice in early and salvage the best from a difficult circumstance.
For lessees:
• Early negotiated surrender may cost a lump sum now, but done while there is still capital in hand, it could preserve other assets, and in extreme circumstances, avoid costly wind-up and insolvency actions.
• Reputational protection in a surrender over a landlord eviction down the line.
• For multisite tenants, a possible opportunity to consolidate.
• Potential for re-useability of fit-out in some cases over costly make goods.
For landlords:
• Lump sum termination monies may provide relief in the short- to medium-term for mortgage costs, insurances, rates and other taxes.
• An ability to search for a new occupier while some income is still covering the premises.
• Negotiating now with an embattled, but solvent tenant versus costly pursuit of an insolvent tenant later.
Many of these discussions often happen far too late, but in the case of highly effective communication between the parties, much better outcomes could be reached. Often the commercial property manager is one of the key identifiers in this chain, and commercial agents adept at lease negotiations are ideal as mediators in the ensuing discussions.*
(*Ensure that you have professional advice in relation to legal and financial matters prior to making final decisions.)
Jason Luckhardt heads the commercial division for NAI Harcourts Australia.
