Friendly Reminder

Applications for the NSW commercial landlord hardship grant close on 31 May 2022. If you are an eligible commercial landlord, make sure you submit before the final deadline.

If you need assistance or have questions about the application, please contact us at NS Legal.

Under the pandemic, businesses have been affected to varying degrees, and some tenants have been unable to pay their rent. Falling behind on rent can have a major impact on your premises, and most importantly, it may result in you being evicted and locked out. If you cannot pay the rent, you should consider putting a plan in place before it is too late. Today, let’s look at the options available to your business when you cannot pay the rent.

One

Negotiate with Your Landlord

If staying in the leased premises is in your best interest, the best option is to negotiate some form of rent relief or payment plan with your commercial landlord. Keep in mind that commercial leases can be very strict when it comes to calculating and collecting rent. It is very likely that the lease agreement contains no express legal right to rent relief or a payment plan.

Factors to Consider Before Negotiating

Before negotiating with your landlord, it is important to understand your legal and commercial position. Factors to consider include:

The history of, and relationship under, your commercial lease;

Whether you have provided any personal guarantees for the lease;

Whether the entity that signed the lease holds any other assets;

How long the lease term is;

Whether you have any long-term agreements attached to the lease, such as equipment leases, franchise agreements or licence agreements;

How much your bank guarantee is?

Two

Terminate the Lease Early

You can also terminate the lease with your landlord before it expires. There are several options for terminating a lease agreement, and each carries its own risks and consequences.

Termination Permitted by Contractual Rights

Check your lease agreement to see whether it contains any termination clauses. To terminate the lease under contractual rights, you should ensure that you comply with the requirements set out in the lease.

Termination by Mutual Agreement

If both you and your landlord agree that you may terminate the lease early, make sure that the termination is documented in writing. This document is often called a deed of surrender of lease. This document is critical, as it ensures that neither you nor the landlord has any further liability under the lease.

Termination Under General Contract Law Due to the Other Party’s Conduct

In some circumstances, you may terminate the lease if the former landlord made promises or representations about the arrangement or property that you relied on when entering into the agreement, and those representations later prove to be false.

In general, courts assess these types of claims on a case-by-case basis, so you should seek legal advice before taking any step to terminate the lease.

Consequences of Improper Early Termination

If you terminate the lease improperly, you may be in breach of the lease. If your landlord considers you to be in breach of the agreement, they may:

Re-enter the premises and change the locks;

Pursue damages from you for unpaid rent;

Recover any additional losses incurred in reinstating the premises.

Three

Assign the Lease

Another option is to try to find someone to take over your existing lease. The process of transferring the lease to another person is known as assignment.

When assigning a lease, there are several factors to consider, including:

Whether your lease contains an assignment clause;

Whether your landlord consents to the assignment;

The correct steps to effect the assignment.

Four

Sublet the Premises

If your commercial space is large, you may also consider subletting the premises. When subletting, you will still need to follow similar steps: obtain your landlord’s consent and follow the correct procedure set out in the lease agreement or state legislation.

Keep in mind that this structural change means you will effectively become a \u0022sub-landlord\u0022. If the subtenant fails to pay rent, you will be responsible. Under the head lease, you remain ultimately liable for your own obligations.

Final Thoughts

If you cannot pay the rent on your shop, there are other options available to you. At this stage, you should seek legal advice and make decisions about your options as soon as possible, so as to avoid further arrears and the risk of eviction. If you need help with a retail lease, our experienced lawyers can assist by answering your questions, and drafting and reviewing your documents.