How To Negotiate A Commercial Lease Agreement?

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How To Negotiate A Commercial Lease Agreement?
How To Negotiate A Commercial Lease Agreement?

The thickly populated and highly commercialised city of Sydney is one of the most sought-after regions for commercial investments. The Alpha Global City is considered a mecca for magnificent office buildings, spectacular shopping centres and modern warehouses. Its high-end properties, along with other small commercial projects, manage to collect the highest prices from bidders from across the world.

However, the recent upheaval brought about by the COVID-19 pandemic has changed the way properties are being leased. In the wake of the crisis, the Federal Government has come up with regulations to save the financially distressed commercial landlords and tenants. Thus, if you are planning to invest in commercial real estate in Sydney, then you must be aware of the new rules of lease negotiation in the state. It has been a tough time for small businesses which have been struggling to stay afloat and pay for the fixed costs as well as landlords who need to pay mortgages. Let us understand how the rules of the game have been altered.

 

Changes Related to Commercial Tenancies 

The Government has set up a mandatory code of conduct for commercial tenancies that lay down the good faith leasing principles between both the parties. It is applicable to businesses which have a yearly turnover of up to $50 million and are eligible for the JobKeeper Payment.

In NSW, tenants can avail rent relief and lease negotiations until December 31, 2020. Also, the landlords can benefit from the land tax relief, which offers concessions up to 50% for 2020 if they have reduced the rent. In addition, they can also take advantage of three-month deferral on the outstanding land tax payments.

As per the Retail and Other Commercial Leases (COVID-19) Regulation 2020, the landlord cannot terminate a lease agreement if the tenant has been affected by the pandemic and is not in the condition to pay the rent. The rent relief can be offered for six months to eligible tenants. The amount that needs to be reduced must be negotiated between the two parties through a mutual agreement. As a landlord, you will be eligible for the land tax relief if you agree to provide rent relief to your tenant.

 

New Guidelines During the Pandemic

The code of conduct has outlined several leasing principles which have been developed to support commercial real estate owners and tenants in Sydney, including the eviction ban.The primary obligations related to rent reduction include offering a deferral or waiver which is comparable to the drop in income of the tenant. The deferred rent must be paid back by the tenant during the remaining part of the lease or within two years, whichever comes later.

The regulation is meant for only those tenants whose turnover has dropped by a minimum of 30% or their yearly turnover during 2018-19 was below $50 million. The code of conduct is applicable to all commercial properties in Sydney,ranging from offices to retail and industrial. If the tenant is not an eligible candidate for the rent relief but has been affected by the pandemic, then the landlord can still provide support by negotiating new lease terms.

 

How to Negotiate A Commercial Lease?

The Retail and Other Commercial Leases (COVID-19) Regulation 2020 must be thoroughly read and examined by the landlord to fully understand his rights and obligations. It is also highly crucial to read all the leasing principles provided in the code of conduct to be aware of the obligations during the pandemic. After you have taken a close look at the new guidelines, you must have a detailed discussion with the tenant on the matter.

If your tenant has been suffering losses and is eligible for the rent waiver or deferral, then you must talk to each other regarding the same. Connect with each other in a safe environment to negotiate the new lease agreement. All the terms and conditions should be agreeable to both the parties before going ahead. Once you have mutually agreed on the new terms, you can prepare the agreement. It must be signed by both parties and each should keep one copy for safekeeping.

 

Results of Commercial Lease Negotiation

The lease negotiation can have different results as every landlord or tenant may not be ready to cooperate. Here is how to deal with the situation. 

  • Both Parties Agree on Rent Reduction

It is an amicable situation where the tenant shows proof of a decline in turnover during the pandemic. To prove his eligibility for the rent relief, the tenant must further provide the business activity statement showing the annual turnover during 2018-19. Equipped with this information, the landlord agrees to reduce or defer the rent. Both the parties agree to the arrangement and sign the new lease agreement. In return, the landlord becomes eligible for land tax relief. In this situation, there is no dispute and the matter is resolved mutually.

  • Landlord Does Not Approve of The Reduction

In some cases, the landlord may have already paid the land tax for 2020 and may not agree to rent reduction. It can become challenging for the tenant who may be facing a financial crisis due to a drop in sales. If both the parties are unable to reach an agreement, then they can approach the NSW Small Business Commission for mediation. A professional and experienced mediator helps in negotiating lease as per the code of conduct while keeping the interests of both parties intact. In this situation, the landlord can be offered a rebate of the same amount that is reduced from the rent which is up to 50% of the landlord’s land tax liability for 2020.

  • Regulation Extension Related Negotiation

The regulation was extended from 24th October 2020 to 31st December 2020 recently, and it has allowed those tenants who are eligible for relief to extend the waiver or deferment of rent. The landlord and the tenant can negotiate the new rent relief after checking the decline in sales in the last quarter. In case, the tenant has regained his/her sales, then he/she will have to start paying the usual rent along with the deferred rent over the period decided between the two parties.

 

Endnote

With businesses coming back on track and people moving out with all the precautions, commercial real estate in Sydney will soon be moving on the path of recovery. Meanwhile, if you plan to lease your property this year, then keep the information provided above in mind during the lease negotiations.

Author Info Sophie Barrett

Sophie Barrett is an experienced real estate marketing professional with a specialisation in commercial property market. She has a Masters degree in marketing from the esteemed Melbourne Business School and has several property management certificates to her credit. Her shrewd marketing policies and business acumen have led to the most rewarding property deals in the major capital cities of Melbourne, Sydney and Perth. She is a popular name in the real estate market and has been serving the industry for almost two decades now. CommercialProperty2Sell is proud to partner with her for some astute discussions and advice on the booming sector.  

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