Commercial property management: What if a commercial tenant is in arrears?

REIQ Commercial & Industrial Chapter Chair Jason Luckhardt considers what options might be available in the event a commercial tenant has fallen behind.

If you have a commercial tenant in arrears, what is the best course of action?

A lease surrender might seem like the last resort but it might not be the worst idea to consider.

Current economic conditions are having varied impacts on trading performances across commercial market sectors – both positive and negative. The high levels of voluntary administration and subsequent insolvencies suggest that, for many, the headwinds have taken their toll.

Some lessees have survived on degrees of respite carried over from the past couple of years. Some are simply struggling in a 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 a significant reduction in their cash flow.

Pick your cliché, but the essence remains for landlord and lessee alike: it is not easy to accept these realities but it often better to get the right advice in early and salvage the best from a difficult circumstance.

It is also essential that your client understands the legal implications of a lease surrender and whether there are any considerations under the terms of their specific lease.  If your client is considering a lease surrender, they should seek legal advice prior to taking any action.

Potential benefits 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;

• The potential for reputational protection in a surrender over a landlord eviction down the line;

• For multi-site tenants, a possible opportunity to consolidate; and

• The potential for re-usability of fit-out in some cases over costly make goods.

Potential benefits for landlords

• Lump sum termination monies may provide relief in the short to medium term for:

• mortgage costs;
• insurance; and
• rates and other taxes;

• An ability to search for a new occupier while some income is still covering the premises; and

• Negotiating now with an embattled, but solvent tenant should be weighed against the 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 links in this chain, and commercial agents adept at lease negotiations are ideal as mediators in the ensuing discussions.

Jason Luckhardt heads the Commercial Division for NAI Harcourts Australia.

Read more from the REIQ: Future proofing rent reviews for commercial and retail leases.

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