If you are a retail business owner struggling in the current challenging retail environment, paying high rent could be inflaming the situation. Many struggling retail tenants are attempting to renegotiate their leases or even considering selling up.
Covid-19 – My Retail Business Is Struggling
If this is the position you find yourself in, it is worth considering your lease options. Difficult times require a clear decision-making process. This article outlines this process, including how to:
- You should assess your current situation;
- compare your risks;
- negotiate your lease; and
- decide your next move.
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You Should Assess Your Current Situation
The first practical task is to objectively assess your situation. To do so, you should consider:
- Do you have a personal guarantee on the lease. This is important because your personal assets will be on the line if the personal guarantee is triggered, and this may change how you approach any negotiations with the landlord;
- Does the entity that signed the lease also operates other sites and has other assets. This is important because the greater the company’s assets, the higher the chance that the landlord may sue for any losses it suffers. If the company has no assets other than the business at hand, the threat to wind up is more credible;
- how long you have left on the lease and any other long term contracts (e.g. equipment leases). This is important because the landlord could potentially refuse to terminate the lease and keep sending you invoices for the rent for the remaining term. If you have a long term remaining, this problem is more complex;
- is an urgent situation requiring immediate action or an issue that you will be able to negotiate over several months. For example, you should consider whether your retail business is struggling but close to break-even or in crisis;
- how much your bank guarantee is (i.e. the security deposit your landlord may have required) and whether it will cover the amount of rent outstanding; and
- Is a franchise agreement, licence agreement or other long term third party agreement. If there is, you will need to consider how to cancel or renegotiate these arrangements.
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Balance Risk
Next, you will need to consider the risks of leaving with your existing commitments. For example, it may make sense to continue trading if:
- you have a long term lease with at least 3 years remaining;
- you have a personal guarantee; and
- the company that signed the lease has other substantial assets, such as other profitable retail outlets.
This is because even if the business is struggling, continuing to trade or selling the business for a nominal price may be necessary to avoid the risks of a substantial claim from the landlord or finance company.
However, if the lease has a relatively short period remaining, there is no personal guarantee and the company has no other assets, you could potentially be more aggressive in your negotiations. In this situation, you may be able to terminate the lease and walk away with minimal personal risk. While you may face the loss of your bank guarantee and investments (e.g. the fit-out), you may be able to avoid other consequences, such as the landlord or finance company taking action against you personally.
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Negotiate Hard
Once you have assessed your legal position and potential liabilities, you should contact the landlord as soon as possible and alert them that you are struggling. There is no point in hiding the crisis and trying to pay rent if the business is unsustainable.
Before calling your landlord, consider any mitigating circumstances that may help your case for requesting reduced rent.
For example, the landlord may have failed to undertake building works (such as electricity or plumbing) that you ended up completing. Or perhaps the landlord stated that your location was a ‘premium site with a great history’, but you later learned that multiple businesses had failed in the same location.
Such issues could be justification for reduced rent, and now is the time to raise them. However, these kinds of claims require very careful legal analysis. Do not raise them without reasonable grounds.
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Make a Decision
If the landlord treats the threat of you leaving seriously and negotiates some kind of rent reduction or suspension, make sure that your agreement is in writing. There should also be a deed of variation or other documentation to record the new arrangement. A verbal discussion can often lead to confusion between the parties.
For example, you might believe the deal involves a rent waiver, whilst the landlord might believe you have agreed to a temporary rent suspension, with the outstanding amount to be eventually paid back. A written document will avoid any such confusion.
If the landlord does not respond to the request for a rent reduction, you may need to make a difficult decision. Importantly, you should make this decision before you run out of funds. If you continue to pay rent in the absence of a response from the landlord, you may end up in deeper trouble with the tax office or other third parties.
It is better to leave with a fighting fund to combat any claim from the landlord than to continue sustaining significant losses and later make a crisis decision with little or no money left.
Key Takeaways
If your retail business is struggling, you should obtain legal advice regarding your options as soon as possible. This will allow you to take considered action at the earliest possible time. If you find yourself in this situation, you should:
- assess your current situation;
- compare your risks;
- negotiate; and
- decide your next move.
Many people keep their heads in the sand when a business becomes loss-making. However, this only results in a delay in addressing the problems and may deepen the losses you face. If you need help with your retail lease, contact Platinum Lawyers (NSW) Pty Ltd Leasing Lawyers on (02) 8084 2764
