What to do if your tenant requests a rent reduction
Wednesday, March 25, 2020
Tenants are experiencing a downturn in business across Australia in the wake of the COVID-19 pandemic. Financial pressure for tenants is mounting and landlords, it seems, are being “expected” to bear a portion of the burden.
This extends to residential tenants as well as commercial lessees.
If you are reading this article then chances are you have already had a tenant contact you asking for a rent free period or a rent reduction. Some tenants are seeking 3 months or longer.
Our recommendations to commercial and residential landlords at this time are:
- You are not legally obliged to offer or accept a rent reduction but landlords should consider the difficulties of trying to find another tenant in the current market.
- Ask the tenant for their proposal first. The tenant knows the impact the virus is having on their business better than the landlord. Landlords should not be making the first move.
- Check your bond or bank guarantee. Ensure you have access to it if needed. Perhaps it has become lost, in which case it should be reissued as soon as possible. Bonds and bank guarantees are usually set as (for example) three months rent plus outgoings and GST. That amount increases each year in line with the rent reviews (e.g. CPI or percentage increases) but landlords rarely ask their tenants to top-up the bond. More often, the bond or bank guarantee you have will be for the rent existing at the time the lease was signed, which may be less than it should be. Landlords should be asking tenants for fresh bonds and bank guarantees in this period of uncertainty.
- Landlords who wish to offer their tenants reduced rent or a rent free period should add this period to the end of the lease. This can only be done by using a formal legal document (e.g. a Deed of Extension). This is a very quick and cheap process. In response to the crisis, our business law team is able to turn these around within a day. For a few hundred dollars in legal costs (which the tenant will pay), the extension document protects the landlord for the incentive they’re giving the tenant. It makes the incentive a relief rather than a gift.
- Conduct monthly reviews (NOT rent reviews!) of the tenant’s situation and make decisions about what rent reductions should be offered as information comes to light. This is particularly important. The information on the virus and it’s economic impact change rapidly (more often, daily). Landlords should not rush into providing 3-6 months worth of free rent in circumstances where there is no information as to how long the pandemic may last. Imagine how the landlord will feel (more particularly, their back pocket) if they grant a tenant 6 months rent free and the pandemic and financial system recover within 6 weeks.
Our business law team are currently on standby to immediately assist you with:
- Creating binding legal documents to reflect extensions and changes to lease terms;
- Creating, reviewing and registering commercial leases;
- Drafting special terms to be inserted into residential leases;
- Resolving lease disputes between landlords and tenants;
- Advice on lease terms;
- Debt recovery and litigation; and
- A great deal more.
We are operating as normal, contact us today.
Phone : 1300 334 566.