If you are a commercial tenant this may be an opportune time to renegotiate some of the terms of your lease as part of your next lease renewal.
In the wake of lockdown, the demand for commercial premises has arguably been slowing.
With another recession potentially on the horizon, many landlord’s will prefer to lock in their existing tenants for another term rather than risk the premises sitting vacant, even if that means agreeing to a reduced rental or shorter renewal periods.
Under the Auckland District Law Society form of lease, a tenant can exercise their right of renewal as early as they like, provided they notify the landlord in writing no later than 3 months before the renewal date. You may be able to use the downturn in the market as leverage to negotiate more favourable lease terms in exchange for renewing your lease early (or at all). When notifying your landlord in writing that you intend to renew the lease, you need to make it clear that such renewal is subject to the landlord agreeing to your proposed terms.
The terms you choose to renegotiate will depend among other things on your business, your current financial position and goodwill in the location of the premises.
As a general guideline, you could consider requesting one or more of the following variations:
- Rental and Opex: A rent reduction; a gross lease; or fewer carparks. You may also consider reducing the frequency of any rent reviews.
- Rights of Renewal: If your lease provides for two rights of renewal of three years each (i.e. 3 x 3), consider requesting a shorter renewal term such as two rights of renewal of one year and two years respectively (i.e. 1 x 1 x 2 x 2). This will give you an easier exit strategy if you are concerned about the future of your business, while still preserving the duration of the lease in the future.
- Limitation of Liability – Limit your liability (or your guarantor’s liability) under the lease to 3 months gross rental.
- Make Good Provisions – Remove some or all of the make good obligations in the lease to reduce your exit costs if the lease expires or is terminated;
- Sublet- If your business operations have become smaller and you require less space, you may consider subletting a portion of the premises.
If your business has been marginal this year and you are concerned about your ability to carry on trade, you may decide not to exercise your right of renewal at all and simply allow the lease to rollover to a monthly tenancy. This means that you or your Landlord can cancel the lease at any time by giving one month’s written notice to the other. This provides an easy exit strategy if you are concerned about the solvency of your business in the immediate future, although you risk the landlord terminating your lease at short notice.
Before you opt for a monthly tenancy, consider the following:
- Has your business committed to any fixed term supply agreements?
- Will you be able to meet your contingent liabilities if your business is interrupted while you find alternative premises?
- Are you considering selling your business and assigning the lease in the future as part of the goodwill?
When it comes to renegotiating the terms of your lease, target one or two variations that will provide you with the most comfort going forwards. You will still want to maintain good relations with your landlord so pick your battles wisely. We also recommend that you engage a lawyer to facilitate negotiations on your behalf to streamline the process and to distance yourself from the negotiation process to avoid a breakdown in the tenant -landlord relationship arising.