Melbourne, Australia - August 30, 2015: People walking past an auction sign on display outside a house in Melbourne during daytime. The property market in Melbourne is one of the strongest among other capital cities in Australia.

WFH and the Shrinking Commercial Footprint

Andrew Grima ||

These last 90 days or so have shown the working population of our country that it is possible to work from home. For some of us, me included, it has been a mixed blessing. I’ve been able to wear my tracksuit every day, not shave and see my wife and kids more. But I have also missed my colleagues and the hustle and bustle and downtime of commuting.

However, where I have landed for the now foreseeable future is working 3 days a week in my local office close to home and 2 days a week from home. My story is no doubt replicated throughout our economy. So, what does this mean for the commercial leasing world?

I have read a lot of commentary and am already fielding calls from my clients about how they can reduce their commercial office footprints. People are recognising that their existing footprints are now too big or rendered redundant as their workforce is spending a chunk of their working week now at home.

So, what does this all mean if you have a commercial lease? The bad news is that if you have signed up to a lease, you simply cannot walk away. So, if you are in this predicament, here are some tips that may help you.

Subletting

A popular solution for many businesses will be to offer all or part of their tenancy to another business through a sublease or licence. Based on my own anecdotal evidence, I can see this as a popular solution. It could be as simple as a business taking over the whole footprint with minimal alterations; a requirement to subdivide the footprint through the installation of walls; or simply offering office and boardroom space on a casual basis. Either way, some key considerations may include:

  • checking your lease to see what you are allowed to do;
  • knowing if your lease has restrictions on subleasing or licensing only part of the footprint;
  • understanding the requirements for consent by your landlord for any such arrangements; and,
  • remembering that any such arrangement will not nullify your obligations under your lease for the whole of the footprint – so if your subtenant or licensee is in default, the buck stops with you!

Assignment

You may also consider assigning your lease to another party – this may be more problematic as any incoming tenant may not wish to inherit your obligations and the remaining term may be insufficient for them. If rental rates fall, as is forecasted, this will mean that the rent any assignee is paying under your lease is higher than what they would be paying if they were to negotiate a new lease. You would need to advertise with an agent. Some key considerations under an assignment include:

  • again, your first point of reference is your lease – what are the conditions of consent to assignment;
  • what information will your landlord ask you to provide to assess any potential assignee;
  • will the landlord require any additional security – either cash deposit, bank guarantee or personal guarantees beyond what you are providing;
  • will you and your guarantors be released upon assignment; and,
  • will the assignment trigger a call back of any incentive that you have been given under your lease?

Surrender

In a perfect world, you may be granted an early surrender of your lease. This will mean that you are released from all future obligations from a point in time. However, the landlord is not obliged to offer you an early surrender and it is likely to come at a cost. The starting point for the landlord is to request a payment based on the rent payable for the remainder of the term, re-letting costs and make good. It is then up to you as a tenant to try to factor in the likelihood of the landlord securing another tenant and therefore reducing this payment to the extent of the likely rent they will receive from any incoming tenant. This is not an easy exercise but it may well be that another tenant is seeking your footprint and that rather than an assignment, they are prepared to enter into a new lease which necessitates your surrender. You may still need to pay a surrender payment to factor in any future make good costs and a shortfall in rent the landlord is now receiving (especially in a falling market). Each case will differ and in the end it will boil down to a commercial negotiation. Some key considerations around any surrender include:

  • what is the remaining term under your lease (as this will be one of the drivers of your surrender payment);
  • what does your lease say about make good;
  • how much have rents fallen by (as this will also be a driver of your settlement payment); and,
  • would any incoming tenant require or be prepared to pay for any items of fit out, furniture or equipment?

The last few months have changed the way we go about our work – I don’t believe this is temporary and I think it will have ramifications for the way we see the commercial tenancy space from now on. Given that rent forms a major part of our cost of doing business and our commercial tenancy in many cases identifies who we are as a business, we are clearly at a cross road in the history of the commercial tenancy scene. You may well be pondering what to do in the future.

If you would like to discuss in more detail the possible solutions outlined above, please do not hesitate to contact a member of Coleman Greig’s Commercial Property team. We are more than happy to steer you through these solutions and if you have already negotiated a deal, we can also assist you with ensuring you have an appropriate agreement in place.

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