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Property Law News, March 2011

A quick summary of some tips to consider if you are a landlord or a tenant

At Forum Law we have seen an increase in enquiries from landlords and tenants seeking to enforce or review their obligations under a commercial or retail lease.

Before granting a lease, a prudent landlord will take care to evaluate the prospective tenant's financial capacity. Nevertheless, a tenant's financial capacity may change after the lease has been signed and most landlords take little interest. While this may usually not be a problem, in times of economic difficulty it is in the landlord's interests to pay closer attention to his tenant.

A landlord may be able to minimise risk by:

  • becoming more familiar with the tenant's business
  • making regular inspections of the premises to see that they are properly maintained, there are adequate levels of stock, there have not been significant reductions in staff numbers or reduction in customer numbers and that equipment is not rundown
  • where there are corporate tenants a landlord may monitor changes on the ASIC website, including new company charges, resignations or appointments of directors and significant share transactions
  • obtaining periodic credit reports from third party providers
  • undertaking periodic searches of court judgments (for example, through Austlii) to see if the tenant or the guarantors are involved in any Court proceedings
  • obtaining insurance cover for loss of rent. This must be done before there are any signs of default.

Where termination of a lease is unlikely to result in finding a new tenant a landlord may agree to:

  • deferral - extension of time to pay rents
  • abatement – reduction of rents for period
  • moratorium – suspension of rents for a period.

Other options that may be considered include:

  • a moratorium in respect of outgoings;
  • a restructure of a pre-existing lease incentive (for example, accelerating the incentive to reduce current rent payments);
  • concessions in relation to ongoing fit out or maintenance obligations;
  • agreeing to permit subleasing of part of the premises;
  • agreeing to a variation of the lease to reduce the size of the premises and allow the landlord to lease the rest of the premises to another tenant.

Where changes are made to your agreement it is important to use a deed to document this. Using a deed will make the changes confidential, which may be important if you have multiple tenants in a building and will prevent the changes applying to future tenants as it will not vary the lease itself. A deed should:

  • establish and set out the default so there is no later argument by the tenant
  • include specific terms set out carefully and completely – e.g. details of dates that payments fall due, the amounts and what those amounts relate to
  • be expressed in clear terms that it is not a waiver of the landlord's rights but a suspension, deferral or abatement of rights under the lease
  • include a default clause specifying that a default brings to an end any concessions made under the deed.

If solvency is an issue, include a provision that a failure to make payments under the Deed is evidence that the tenant is unable to pay its debts and entitles the landlord to apply to wind up the tenant.

If the breach by the tenant would entitle the landlord to terminate the lease, the right to terminate should be expressly reserved in the Deed and the tenant required to give an acknowledgment that a termination by the landlord under the Deed entitles the landlord to terminate the lease and that the tenant agrees that they will not be able to make an application for relief against forfeiture in those circumstances.

If there has been claim by tenant regarding the rights of the landlord to take action, the Deed might also contain a release by the tenant of such claims.

The Deed might make the concessions conditional on the tenant providing specific financial information and reports on a regular basis both during the period the Deed applies and also continuing thereafter.

If additional security is available (for example, directors' guarantees or third party guarantees), the Deed could be conditional on that additional security being provided.

For tenants approaching a landlord for some form of concession it is a good idea to:

  • prepare a current set of financial reports, a detailed cash flow and a business plan which explains what the financial issues are, how long the problem is likely to last and how they plan to address it.
  • prepare a proposal to put to the landlord, setting out the concessions sought, taking into account that the landlord is likely to prefer to receive a continuing proportion of their rent every month, rather than no rent particularly if the landlord has mortgage payments to meet.
  • offer to keep the landlord informed of the financial position on a regular basis so that the landlord can have a level of comfort about progress.

Forum Law is an active member of several reputable law and industry associations. We have recently obtained ISO9001 accreditation.