Advice for surviving the challenges facing Wellington business owners

High inflation, labour shortages and a cost-of-living crisis have all conspired to create an economic recipe for disaster for many businesses across New Zealand. Recently, this struggle has perhaps been felt most acutely by Wellington business owners, with concerns voiced over reduced inner-city foot traffic and ongoing roadworks. These concerns come around the same time as several high-profile Wellington businesses close their doors for good, particularly along the Golden Mile and on Thorndon Quay. 

What steps can Wellington businesses take to give themselves the best chance of emerging from the current set of challenges many are facing? This article focuses on options business owners might consider in relation to their leasing arrangements.

The importance of your lease

The rent a business pays to lease its premises is often one of its most significant liabilities (if not the most significant). 

Commercial rents are typically determined by a range of factors including the size, location and quality of the premises; the rent payable for comparable premises nearby; and prevailing conditions in the local commercial property market.

When it enters into a lease, the tenant will typically expect the premises and wider locality to remain of a similar standard/character and otherwise be fit for the tenant’s purposes throughout the entire lease. Unfortunately for businesses, it is usually the tenant that takes on the risk of this not being the case (most commercial leases include a provision relieving the landlord from any liability if the premises become unsuitable for the tenant’s intended use). If, for example, a business records a sharp drop in customers after a number of public car parks are removed next to its premises, it is unlikely the lease will provide the tenant with any recourse against the landlord.

Equally, recent economic challenges do not meet the threshold for the mandated rent relief that became commonplace during the COVID-19 lockdowns. This requires the tenant to be physically unable to gain access to the premises to fully conduct its business because of an emergency. Economic hardship alone will not suffice.

Against this background, what options are available to struggling businesses for which rental payments are one of the biggest burdens?  

What can I do as a tenant/business owner under pressure? 

Despite the apparent absence of options available in most commercial leases, struggling tenants often have more leverage than they know. Even if the lease does not provide a right to receive rent relief other than in extraordinary circumstances, it is not uncommon for tenants to successfully negotiate improved lease terms when they are experiencing genuine financial difficulty. There are several reasons for this:

• Terminating a lease is not as straightforward as many believe it to be. The Property Law Act 2007 requires the landlord to first serve written notice on the tenant outlining any breaches of the lease it has committed. The tenant must also be given a specified period of time to remedy those breaches. Even if the tenant remains in default, it is possible to apply to the Court for relief against cancellation of the lease. The Court has been receptive to such applications on occasion, even when it is accepted that the tenant did breach its lease obligations. Often, landlords with tenants who are struggling to pay rent will prefer to reach a negotiated solution with the tenant, rather than taking steps to terminate the lease (which is not without risk to the landlord).

• Many landlords appreciate it is often more beneficial to assist tenants through a difficult period than to cut their losses and find a new tenant, which may not be easy (particularly in an economic downturn). 

• Even if a replacement tenant can be found, it is customary for the landlord’s agent to take the first two months’ rent as commission. If the tenant requests a rent-free period as an incentive to take up the lease, the landlord might not receive rental payments for several more weeks/months. In other words, discarding a struggling tenant in search of a ‘better prospect’ can end up being a false economy for the landlord. 

• Many landlords will be willing to grant concessions to tenants simply because of the goodwill built up between the parties during the lease. A ‘good tenant’ before financial difficulties arise will still be a ‘good tenant’ once those challenges are overcome.

What concessions can parties to a commercial lease negotiate to help the tenant navigate a period of financial difficulty? The answer will depend upon the parties’ specific circumstances, however, some of the more common agreements involve one or more of the following:

• Rent abatement: the tenant is relieved of a proportion of its rental payments, with no obligation to repay that proportion at a later date.

• Rent deferral: a proportion of the tenant’s rental payments is deferred to a later date (or dates, if the parties agree the deferred proportion will be repaid over a period of time). 

• Nil rent increase on review: the parties agree the rent will not be increased at an upcoming rent review, even though the landlord would otherwise be entitled to do so. 

• Reduced term: the lease is varied to reduce the balance of the lease term (which reduces the tenant’s overall remaining rental liability). This may be appropriate if the tenant has ‘crunched the numbers’ and determined it can meet its lease obligations only for a certain number of additional months. The final expiry date of the lease is brought forward to that crunch point (or alternatively, the tenant is given a right to renew the lease from that date – which it can exercise if its financial position has improved).   

Regardless of the particular outcome sought, the key is to engage early and robustly. Tenants should be open and honest with the landlord, supply sales figures and other financial information to substantiate their position where requested/appropriate and leverage the expertise of their professional advisors.

What if the landlord won’t ‘come to the party’?

Unfortunately for businesses, not all attempts to negotiate variations to the lease will be successful. Sometimes, the landlord will insist upon the existing terms of the lease (often because they too are facing challenges).

In this situation, it may be necessary for the tenant to look for a third party to take over the lease prior to its expiry. Most commercial leases permit the tenant to assign their interest in the lease to another party, provided they first obtain the landlord’s consent. 

Another option is subletting part of the premises. This may be appropriate where the tenant cannot locate another party to take up a lease of the entire premises, or if the tenant wants to keep operating from the space but in a smaller and more affordable portion. 

In either case, it is wise to reach out to commercial leasing agents familiar with the area where the premises are situated to assist with the search for a potential assignee or subtenant. 

Final thoughts

A business’ lease is, in many cases, not the key issue underlying the challenges it may be facing. However, a negotiation with the landlord is one lever tenants can pull to give themselves more time to consider other survival options (e.g. restructuring, refinancing or finding alternative premises).

An experienced advisor often makes all the difference when issues arise. We have considerable experience assisting both landlords and tenants on a wide range of lease matters and we appreciate the interests and motivations each party typically has. If you would like to review your leasing arrangements, please feel free to contact Jordan Todd to discuss your options.    

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