CASE STUDY How reducing your rent plays a role in a post COVID landscape for the tenant and the Landlord: One Tenants Story.
COVID has changed the commercial leasing landscape for Tenants as well as Landlords. No one could have predicted the financial impact of the pandemic and the resultant pressures on Tenants and Landlords alike. So, what are some of the initiatives that are helping Tenants and Landlords to work together on the path to recovery and get back to business as usual?
A Tenants Story of How She worked with the Landlord to build a Business COVID Recovery Plan …
Prior to COVID
Michelle is the owner of a hairdressing and beauty salon located on the Gold Coast. She is a confident business owner who has organically grown her business over the past 15 years. Starting with one tenancy and expanding into the adjacent tenancy when it became available. Michelle invests in all areas of marketing to drive traffic to her salon and as a result, the other retailers in the complex also benefit from the foot traffic that she drives.
Michelle is highly regarded in her industry and has always been a good tenant, paying her rent on time and never needing to ask the Landlord for assistance.
Pre-COVID Rent and Sales
Prior to COVID, Michelle was paying $62,000 rent per year, which represented approximately 15% of her annual revenue which is in the “acceptable” band for occupancy costs for her industry. She was excited about the future of the business and had every intention of renewing her lease, when it expired in October 2022.
COVID Hits in March 2020
In late March 2020, the federal government mandated that all hair and beauty businesses needed to close. We all have our own memories of that week and Michelle was no different. A single Mum to a young daughter and a small business owner with the responsibility of putting food on the table. She was devastated, scared and had no idea how she was going to be able to stay in business and look after her family.
Prior to COVID Michelle’s average monthly income was approximately $40,000. Revenue for April 2020 was $0 and May was $9,000, some 22% of her regular monthly income and the following months didn’t perform much better. What did this mean? How long was she going to be closed for? What would happen to her staff? How would she pay her rent?
Business Reopens with Substantial Limitations
As the very strict restrictions on business were gradually relaxed, this meant that Michelle could reopen her business. However, her ability to generate revenue was significantly reduced to approximately 50% and her PPE and related costs increased as a result of time required to sterilise equipment, sanitise work areas and of course the closing of every second seat to meet square metre rules.
The Challenge – Income Reduced by 50%. What about the Rent?
With the onerous restrictions now in place, if Michelle was to pay full rent whilst only turning over half of her pre-COVID income, her occupancy costs would skyrocket to 30%+, which left the business in an unprofitable position and the only option would be to close the salon.
A Chance Beauty Appointment with a Retail Leasing Expert
It seemed to Michelle that she had no way out. As luck would have it, she had a coincidental beauty appointment with Kelly, who turned out to be a Tenant Representative who specialises in negotiating lease renewals and new leases on behalf of Tenants. Through a casual conversation and a few tears, Michelle confided her dilemma to Kelly.
Kelly had already looked after a number of Tenants in similar positions to Michelle and had a pretty good idea of what needed to be done to keep the business viable.
A Conversation with the Landlord…
Kelly stepped in to communicate and negotiate on behalf of Michelle. The Landlord was grateful for the feedback on the National Code of Conduct and was very interested in doing what he could to help, as he knew that if Michelle had to close the business, the tenancy may sit vacant for months.
Rent Reduced to Reflect the Reduced Percentage of Sales
Using the National Code of Conduct as a base to work from, Kelly was able to agree an outcome on behalf of Michelle and come up with the following revised arrangement with the Landlord.
- Rent payable was calculated based the monthly difference in sales prior to COVID. So, if revenue was down by 50% for a particular month compared to the same month prior to COVID, the rent would also be reduced by 50%. As revenue gets back to normal, the rent returns to normal as well.
- The enforced rent relief ordered for Queensland was only available for a few months, but the Landlord agreed to extend the relief for a further two years past this date, up until the lease expiry date, to give Michelle the best possible chance of surviving.
- No deferred rent liability would apply. Under the code, any rent waived by the Landlord would be shared 50% with the Tenant, who then had to pay it off over 24 months on top of their normal rent. Michelle didn’t need to worry about this.
- At the point of negotiating this arrangement, it was hoped that sales would return to normal within a few months. It is now April 2022 and sales are still between 30 – 40% down on 2019 / 2020, due to a number of factors outside of Michelle’s control, but stemming from COVID.
What’s in it for the Landlord?
The Landlord was aware that failure to reach an agreement with Michelle would have most likely resulted in the business needing to close. Michelle would walk away from her security deposit and lose her livelihood, her only source of income, as a single parent.
However, the Landlord would then have a vacancy for several months, would need to cover the holding costs, potentially drop the rent substantially to attract another good quality tenant, provide a rent free period, would probably need to pay for the fitout, all before he actually started to see any rent coming in.
From April 2020 to February 2022, the Landlord has received circa $80K in rent, when under the Lease he would have received around $130K, so $50K less than he would have under Michelle’s normal lease. The Landlord will continue to see growth over time as income returns to normal operating levels, as opposed to not receiving any rent for a long time.
The Wrap Up…
The Landlord keeps his prime Tenant, received reduced rent for a period until business returns back to normal, saves the expensive costs of securing a new tenant and keeps his other Tenants happy at the same time.
Michelle gets to keep her business and some income for herself. She has a runway to build her business back to where it was pre-COVID and return to paying full rent as her revenue returns to normal.
A fantastic outcome for the client.
Your Leasing Co. specialises in Tenant Representation and negotiating lease terms for Tenants. If you have any questions about negotiating the best outcome for your new lease or renewal, feel free to call our MD, Kelly Cunningham on 0419 001 093 or email us for a no-obligation, confidential discussion.