Thinking | 22 April 2018
The growing trend of lease re-negotiation
Last week, it was reported that Myer has engaged leading insolvency specialist Mark Korda of KordaMentha to help its chairman negotiate with landlords.
While Myer has publicly ruled out entering voluntary administration, Mr Korda’s presence will be enough to make the potential consequence of not reaching agreement obvious to landlords.
Other tenants have utilised the voluntary administration process to cherry pick which stores are retained and negotiation reduced rent. High profile examples include SumoSaland and Oroton, which have emerged from the administration process with new leases for their favoured stores.
So, why can the stated or unstated threat of voluntary administration suddenly bring landlords to the negotiating table?
If the tenant enters voluntary administration:
- This will likely be a breach of the lease. However, for the duration of the administration the landlord cannot re-enter possession without the administrator’s consent or a court order. Landlord’s often do not like this restriction.
- The administrator may decide, at any time during the administration and with no warning, to close a store. The administrator is not required to make good the store.
- The administrator will be trying to sell the tenant’s business as a going concern. The landlord may be told that if it wants its store to be kept, the lease must be renegotiated.
- While the landlord can lodge a proof of debt for all loss suffered, it ranks behind secured creditors such as banks and may receive no compensation unless it holds a bank guarantee.
Faced with the cost, inconvenience and uncertainty of this process, a landlord may prefer the certainty offered by a lease renegotiation.
What can a landlord do to protect itself?
Voluntary administration is available to any company that is or is likely to become insolvent. However, there are some steps that a landlord can take when entering into a lease to increase its later negotiating position. These include:
- Take corporate guarantees. Parent or related company guaranties give the landlord rights against other companies in the corporate group. This makes it harder for the tenant to separate its assets of value and utilise separate entities to its benefit.
- For SMEs, take director guarantees. This increase the pressure on directors to co-operate and reach an outcome acceptable to the landlord since they have personal exposure. A charging clause will also give security, although probably not first ranking, over any real property owned by the director.
- Obtain a bank guarantee, and keep the guarantee updated as rent increases over the term. If the landlord changes, ensure a new guarantee is obtained in favour of the new landlord.
- Keep an eye on tenants, and be ready to act quickly.
Looking to the future, we expect to see more tenants seeking to renegotiate with landlords or otherwise utilising the formal insolvency process.
Renegotiations, in particular, appear to be gaining momentum – rumours of some tenants negotiating a rent reduction has reportedly led other tenants, such as Premier Investments, to press for similar rent relief or otherwise threaten store closures.
There have also been recent changes to insolvency laws, introducing a safe harbour defence for directors and preventing landlords from terminating leases entered into from 1 July 2018 solely on the basis of the appointment of administrators or receivers (known as ipso facto clauses). These changes are designed encourage a rescue culture in Australia, leading to more restructuring of companies and their liabilities rather than straight liquidation.
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