We have had to endure significant pain throughout the COVID-19 pandemic these last few years, but only now are we seeing the lasting effects for businesses. Despite many businesses moving towards hybrid and working from home models, there are still many businesses that must have a footprint to operate (such as hospitality and retail).
One of the key areas of risk for these businesses and landlords is the lease agreement. The value of a business and the property can be significantly affected by the terms of the lease, therefore the lease should be reviewed regularly to ensure the continuance of the business as well as maintaining the value for a potential sale of either the business or the property itself.
In the case of Bel & Brio, the up-market Italian restaurant based in Sydney’s CBD, the restaurant was adversely affected by the change in market conditions, leading to unpaid rent and eventual lockout by landlord LendLease. According to the owners, the venue has struggled since COVID-19, to the point where closure was considered prior to the lockout.
This is an opportune time for both landlords and tenants to review their current lease arrangements - often forgotten about during regular day to day trading.
Unpaid rent
The most simple of reasons for a termination of a lease – breach of contract. When a tenant falls behind in rent payments, action can be taken by the landlord to recover these unpaid amounts including issuance of a formal breach notice, closure of doors, court proceedings, and in some extreme cases, termination of the lease. Each state has its own regulations regarding how these actions can take place, however the severity of these can result in significant losses for both the tenant and the landlord.
In addition to this, throughout the COVID period, the government assistance given to tenants was to defer up to 50% of its rental payments (and forgoing up to another 50%). This has put an even bigger cashflow burden on businesses with the deferred payments being incurred for the remainder of their lease term.
Lease Terms (Rent Review, Options & Renewal Dates)
Another issue often missed by both tenants and landlords is the terms of the lease, specifically key dates for rent review, options and lease renewal. These dates, a crucial time in the business/investment cycle, are an opportunity for both parties to extend or negotiate the terms of the lease.
Where a rent review date is missed, both the landlord and tenant are missing an opportunity to maximise their own returns based on the current market rates for rent. While missing a rent review date won’t cause a lease to be terminated, both tenants and landlords should be aware of these dates to ensure they are getting the best result for their circumstances.
Of more concern is when an option or lease renewal date is missed. When these dates are missed, the lease effectively comes to an end, and any continuance often is pushed to a periodical (monthly) lease, whereby either party can terminate at any time (in accordance with the previous lease terms). This poses significant risk to both parties and can lead to missed rent for landlords (either an empty tenancy or a missed opportunity to increase rental returns) or closure of business for tenants (if a better offer comes in for the landlord).
Changing Demographics
In addition to making sure your lease terms are met, another key risk for business and landlords is the changing demographics. The COVID-19 pandemic has thrown many curveballs at businesses and landlords these last few years, but only now are we starting to see the lasting effects for our economy. The work-from-home (WFH) movement is here to stay, and subsequently a major effect on businesses both inside and outside the traditional CBD precincts. With many employees deciding to WFH, CBD based retail & hospitality venues (such as Belle and Bro) have seen a major decrease in foot traffic, significantly effecting both top and bottom line trading performance.
Location! Location! Location! Be Careful what you wish for!
With the large developments occurring in all capital cities at the moment such as Barrangaroo, the key to bringing foot traffic in is the venues that are signed up. Belle and Brio were no doubt offered attractive lease incentives up front however there are key commercial lease risks in these attractive sites. The main one being forced to keep the site open 7 days a week for lengthy hours even if the foot traffic does not support the venue being open for this length of time, leading to the venue racking up extensive unneeded costs due to the location.
The ever changing post COVID-19 landscape, coupled with increased development and tightening cashflow, is putting increased pressure on the sustainability of CBD venues nationally. Both tenants and landlords need to be aware of each of these issues to ensure they maintain their wealth moving into the future.
If you have any questions regarding the above, contact Business Services & Taxation Director Colin Samuel at csamuel@prosperity.com.au or Business Services & Taxation Manager, Harry Charalambous at harry@prosperity.com.au. Alternatively, you may contact your Principal Adviser to discuss.