Negotiating rent relief during the COVID-19 pandemic

3 December 2020

On 29 September 2020, the COVID-19 Omnibus (Emergency Measures) (Commercial Leases and Licences) Regulations 2020 were amended and as a result the operation of these Regulations have been extended until 31 December 2020. If you are an eligible commercial or retail tenant that continues to be detrimentally impacted by the COVID-19 pandemic, you may wish to negotiate a further reduction, waiver or deferral in rent by submitting a new application for subsequent rent relief to your landlord immediately.

A tenant is entitled to apply for subsequent rent relief if:

  • The tenant’s financial circumstances have materially changed; or
  • An agreement for rent relief was made prior to 29 September 2020 that does not allow for, at a minimum, proportionate rent relief in accordance with Regulation 10(4)(ba); or
  • The current rent relief agreement does not apply to the period ending 31 December 2020.

An application needs to be in writing and a tenant should supply all the necessary documents and information which comply fully with the requirements set out under Regulation 10. The subsequent rent relief shall apply to the period starting from the date of a tenant’s complying request and ending on 31 December 2020.

Although the Regulations have more or less prescribed the ambits for rent relief to apply, however, these are just the bare minimum that a landlord must offer and there is ample room for a tenant to negotiate for more depending on the actual circumstances of the lease. It is not always easy to negotiate during such difficult times, and in order to reach an agreement that that is fair and reasonable both parties must act in good faith.

So what do you do if you are a tenant who asks for rent relief, or a landlord who is considering a request for relief? Here are some tips that may help you along in your negotiations, whichever side you are on.       

1. Get as many relevant facts as possible to the landlord

The first step in obtaining rent relief will be drafting a formal application for relief – this may be in the form of a letter or an email to the landlord or the landlord’s agent. As a tenant, it is important to include a statement providing as much detail as possible of the specific circumstances that apply to your business, citing relevant examples in the industry and explain how the restrictions to trade due to the COVID-19 pandemic have affected your business. This will let the landlord know that you are in need of financial assistance due to the COVID-19 pandemic and gives the landlord an opportunity to start a dialogue with you about this. A travel agent, for instance, may explain how they are unable to trade due to the closure of domestic and international borders and it is expected that the business will continue to derive no income at all until the entry and movement restrictions are lifted. In reality a travel agent may even be earning a negative turnover due to a significant number of cancellations and refunds being processed every single day since the onset of the pandemic. Although a landlord is required to provide no less than 50% of the rent relief in the form of a waiver of rent, however a tenant in these circumstances may be able to negotiate up to 100% of the rent to be waived or rent abatement for a fixed period of time. Such businesses are normally based in a shopping centre or within a location that has high pedestrian traffic therefore the base rent and other expenses payable under the lease would be substantial. Without any income to sustain even the basic operating expenses, a tenant may be in the position to negotiate a waiver of all outgoings or other expenses charged in relation to the premises. The facts that you provide in an application for relief will be your negotiating tools and gives the landlord the proper perspective on how realistic your demands are.     

2. Consider all possible circumstances including a reasonable recovery period after the pandemic is over   

Underlying the Regulations are the principles of good faith. As far as possible while formulating a proposal for relief, a landlord should take into account how a failure to provide sufficient rent relief may jeopardise a tenant’s ability to fulfil their ongoing obligations under the lease, including the payment of rent and outgoings. The COVID-19 pandemic has significantly changed the way people work generally. Many office premises have been shut since early March until now, and despite the easing of restrictions it is very likely that employees would continue to be required to work from home well into the new year.  Office premises leases are one of the hardest to deal with and negotiate as there is a real possibility that post pandemic, a tenant will not require the same amount of leased space anymore. In light of this, a tenant should endeavour to work with the landlord in reaching a true compromise that is fair and reasonable, taking into account a realistic view of the remaining term of the lease. If a landlord is unable or unwilling to provide an appropriate amount of rent relief that would assist a tenant to continue trading at the premises, then both parties may consider an early surrender or termination of the lease on acceptable terms. A reasonable amount of compensation must be considered in such negotiations as the premises may remain vacant for a very long time as a result of the economic downturn caused by the pandemic.  

3. Relationship and timing is key

As with most negotiations, timing and relationship is the key to success. It is easier to persuade a landlord to give in to reasonable demands when they know a tenant is in genuine financial difficulty and have tried all that they can to mitigate the situation. A tenant that stays in close contact with their landlord from the start of the COVID-19 pandemic until the day a request for relief is submitted, by providing regular updates of their financial circumstances or other documents as required by the landlord, will have a higher chance of success in getting more relief from the landlord than a tenant that simply chooses not to pay rent or outgoings without any communication at all. Although it is no longer a requirement that a landlord’s proposal for relief must take into account their financial ability to offer rent relief, a tenant should nonetheless consider the fact that a landlord may be experiencing financial difficulty due to loss of rental income as well. A tenant that is more willing to recognise and acknowledge this will likely strike a compromise much quicker and in a favourable manner with their landlord. 

4. Be the model tenant

A tenant who does not pay rent on time or causes their landlord to do extra work, such as chasing up on payment of outgoings, is generally considered a bad tenant. Therefore, a tenant should endeavour to be more desirable and improve their leverage during the negotiations by keeping their word on any promises made. If you have previously reached an agreement for rent relief in respect of the period before 29 March 2020 then you should ensure that any payment required under that agreement is paid to the landlord promptly. Once you have shown that you are a good and reliable tenant, the landlord is more willing to provide a relief arrangement that goes beyond the minimum that a landlord has to give under the Regulations. 

5. Understand your bargaining power

In any negotiation for rent relief, it is all about knowing your opponent’s cards and bottom line. It should be emphasised that waiving rent is not the only tool available -  a landlord may also consider deferring rent completely for a fixed period of time, amending other terms of the lease to benefit either party, entering into agreement to draw on a certain amount of security bond, extending current term or adding additional terms to the lease. The quantum of the rent relief offer eventually agreed to by both parties may vary depending on who has a better bargaining power. A landlord is not bound to consider any request that is over and above the minimum requirements as prescribed by the Regulations. As such, it may be a futile exercise for a tenant to exercise unreasonable demands on a landlord without demonstrating good faith. If a lease is about to expire and the landlord knows that they can easily find and put another tenant in, then a tenant is only able to appeal to the landlord’s sense of fairness in their negotiations for further relief. For example, a landlord that is providing a substantial amount of rent relief that far exceeds the minimum requirements, may at the same time request a tenant to extend the current term or otherwise renew the lease for another term - this is a fair and reasonable request. Not only will a landlord have the security of a longer lease term, but the substantial relief will be most helpful to a tenant during this time.  In contrast, where a landlord is fully aware that they have a good tenant and will have to do a lot of work to replace them, then a tenant clearly has some leverage to assert themselves and ask for more.

6.  Use alternative demands if necessary

If it is clear that a landlord or a tenant will not budge during the negotiations, where someone is making unreasonable or unfair demands or otherwise fails to respond in a timely manner to enable the agreement for relief to be finalised in the most cost effective manner, then either party may consider making alternative demands, such as referring the dispute to the Victorian Small Business Commissioner (VSBC) for mediation. The VBSC’s power has now been significantly expanded as a result of the amended Regulations. If mediation fails, the VBSC may issue a Regulation 20A certificate which records that a landlord has failed to respond to a tenant’s application to the VBSC or has not engaged in mediation in good faith. A tenant may also apply to the VBSC for a binding order which determines the amount of rent relief that a landlord is required to provide. Last but not least, either party who is unhappy with the VBSC’s decision may make a further application to VCAT to have the binding order reviewed or in the case of a tenant, an order to enforce the VBSC’s decision upon a landlord who fails to comply. 

7.  Put your new lease terms in writing

At the conclusion of all rent relief negotiations, whether you are agreeing to a temporary rent reduction, a deferral or a new lease agreement altogether, you should ensure that all relevant details are recorded in writing so that both parties are clear on the terms and timeframe for compliance with their respective rights and obligations of the lease as varied by the rent relief agreement. 

If you wish to discuss any concerns you may have with your lease or require any assistance in your negotiations with the landlord, please contact our Marvin Weinberg or Marilyn Wai on 9510 0366.