ARE YOU A LANDLORD OR A BANKER?

As property owners, we have more likely than not experienced a tenant who is encountering a serious financial crisis.  Unfortunately, as their lessor our cash flow is very much linked to their fortunes at least in the short to medium term.  It is not uncommon for tenants to approach lessors asking for rent relief.  How owners respond to such requests may have serious financial consequences. We asked Peter Lucas of Kestrel Solutions to provide some ideas on how owners could respond to a tenant request for rent relief.

Wayne J Robson
General Manager

ARE YOU A LANDLORD OR A BANKER?

No matter what the economic conditions, there are always some businesses that struggle financially. There are many reasons for this, which is in itself is an article for another day. It is no surprise that in difficult economic times the number of businesses that struggle increases.

Faced with cash flow problems, businesses often use available cash resources to pay the ‘squeakiest wheel’ or those creditors they deem essential to their survival. More prudent operators will initiate discussions with key parties such as major suppliers, banks and their lessors. Less prudent operators are often ‘dragged’ along by their circumstances until something finally gives often in the form of a creditor suspending supply and taking legal action to recover outstanding money. Regardless of how the problem comes to light it, is not uncommon for flailing businesses to approach their lessor for some form of rent relief.

The lessor is faced with a dilemma: are they a lessor or a banker; do they consider such a request; how far should they go with rent relief; what questions should they ask of the tenant; and, will they be able to recover any concessions they make? A curt ‘no’ could trigger the rapid collapse of the tenant’s business and all the consequences that brings for a lessor such as loss of rent, unenforceable make-good provisions etc. On the other hand, a generous ‘yes’ by the lessor could result in a protracted cash flow headache for the lessor, reduced asset value and so on.

The question is; what should the lessor do to protect their interests? There is no one simple answer. My experience has shown that the facts of each situation should be assessed as part of the decision. to me several times. How have I dealt with these requests? My process has been simple, I do not want to become a banker, but I do not want to lose tenants either. As such I my process involves seek answers to the following questions:

  • Has this tenant made similar requests in the past and what was the outcome? 
  • What reasons does the tenant put forward for needing rent relief and do they seem plausible?
  • What is the tenant’s plan for recovery and does it include restitution of the lessor’s rent relief? 
  • Is the plan feasible?
  • Does the tenant have underlying problems that can or cannot be resolved by the plan?
  • By providing rent relief, am I merely postponing the inevitable at my expense?
  • What milestones can be put in place to monitor progress – eg regular partial payment of rent is preferable to a complete suspension for a period of time, what financial reporting is appropriate? 
  • How will the rent relief be used and can it reasonably be expected to assist rectifying the problems, eg, are they going to use the money for promotional activities to drive further revenues or are they going to pay some redundancy to reduce their costs. 
  • Has the tenant obtained professional advice from an accountant or business adviser?
  • Is there a genuine commitment to the business and plan by the tenant or are they just going through the motions and buying time?
  • Who else is the tenant approaching for support? if they are a franchise, is the franchisee providing some relief for the franchise fees? Have they approached their banker? Is there silent partners or family members involved? What are the likely consequences of additional debt?
  • What are the proprietors themselves going to do? Are they making appropriate personal adjustments eg reduced salaries or drawings or is it likely the rent relief may be consumed by the tenant’s ‘lifestyle’?


Having assessed all these factors, I then will then negotiate an appropriate plan with the tenant. I want avoid situations where having obtained relief for a three or six month period the tenant returns seeking further relief. It does not mean that I do not want to provide support; but, I do want to know that they are doing what is necessary to improve their business and resolve underlying problems.

As an example, we recently negotiated rent relief with a retail tenant. As part of the relief the tenant provides quarterly financials. After paying their operating costs and outgoings for the lease the balance of the surplus is then split equally between the owners, for wages, and ourselves(as the lessor), for rent, that process has been working well for both parties.

Final tip: do not be too quick to judge. Go through the above process and if you need assistance in assessing the viability of the business then it is best to obtain it from an independent third party.

If we can be of assistance please do not hesitate to contact Peter Lucas on (07) 3232 5250, email plucas@kestrelsolutions.com.au or visit our website www.kestrelsolutions.com.au.
 

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