Property Law - Business Leases - Tenants in Trouble

Date: July 04, 2009

Authors: LAC Lawyers

Tough economic times can bring grief to all of us, in varying degrees. It’s almost a cliché that we should be cautious in our business affairs. But by so doing we should be able to weather the storm. Caution is needed before entering into a lease. But what if the tenant finds itself in a situation which it had not seen coming?
 
Many tenants have found they are committed to a lease which has some years left to run. When they entered into the lease, things seemed fine. With a downturn in business however, they may be finding it difficult to meet the ongoing obligations under the lease, especially the rent and the outgoings. What to do, might well be the question which the tenant needs to have answered.
 
Leases can present particular difficulties by their very nature. A lease generally represents a contract giving a right to the tenant to (in most cases) exclusively occupy some land or a part of some land for a period of time. In return the tenant has to pay rent to the landlord. It is the obligation to make payments for a certain period of time which can cause difficulties.
 
During the period of the lease, circumstances can change. The tenant, in the case of a commercial tenancy, may find that business is down, through no fault of the tenant. In the case of a residential tenant, there might be a change in personal circumstances such as a move inter-state or abroad whereby the tenant no longer has a need to occupy the property and wants to relinquish it.
 
Commercial tenancies are more likely to be fraught with risk of greater loss, usually because the period of the lease is longer so there is a greater financial commitment. There are some special considerations to be taken into account with what are called ‘retail leases’, generally applicable to retail shops. There are also special factors relating to residential leases, strictly referred to in New South Wales as ‘residential tenancy agreements’ under the applicable legislation. However the issues are essentially the same in each case.
 
Faced with the dilemma of a lease with say, another three years to run, and with a commitment to pay rent which now seems untenable in the eyes of the tenant, what should the tenant do? There are several things the tenant should explore, in particular, the transferring of the lease to another person or company. This obviously requires a replacement tenant, someone who is prepared to take over the lease as it is. Alternatively, the tenant could approach the landlord with a view to seeing if the landlord will agree to a surrender of the lease, though this will also usually entail finding a replacement tenant, and the new lease is also likely to be on at least similar terms as the old lease.
 
Another alternative is for the tenant to try negotiating with the landlord for a reduction in the rent, however the landlord is probably unlikely to agree if there is an existing lease which the landlord believes is enforceable. A further alternative, though not attractive but which is quite often adopted by tenants, is to simply walk away, that is, vacate the premises whether with or without the landlord’s consent, leaving the landlord to find a replacement tenant. The landlord may then have a claim for the rent payable under the lease for the remainder of the lease period. Having said that, the landlord would be obliged to minimise their loss as much as possible.
 
In each case, the landlord is entitled to enforce the terms and conditions of the lease (assuming it is enforceable). In the first scenario, the transferring of the lease, the tenant will need to be assured there is a replacement tenant which is at least in a financial position whereby it is able to afford the rent and other financial obligations under the lease. However the lease itself may allow the landlord to insist that any prospective replacement tenant is intending to carry on the same kind of business as the departing tenant. If things have turned sour in the market in which the tenant operates, then it’s unlikely that someone else also in the same market is finding it much different.
 
In general, a landlord is entitled to require the tenant to comply with the terms of the lease (including the payment of the rent as set out in the lease) for the rest of the period of the lease. It is this ongoing obligation which has the potential for problems. Contrast this with an outright purchase of a property in freehold: with a purchase, the purchaser may have to outlay a considerable amount more than the tenant at the commencement but once the purchase transaction is completed, that is usually the end of the relationship between the parties. With a lease, the relationship may continue for years.  
 
Therefore the utmost care should be taken right at the outset when someone is negotiating to rent a property.    Whether you are contemplating leasing or have executed a lease call LAC Lawyers for an appointment on (02) 9904 6800 to obtain proper professional advice and assistance.
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