Friday, June 15, 2012

Commercial Property Managers - Rent Reduction Strategies for Tenants in Difficulty

people blurred walking in shopping centre
Rent reduction can be worthwhile to manage the tenant mix.

In commercial and retail property management you frequently come across tenants that just cannot pay the rent.  For some tenants it is a short term problem whilst for others it can be a long term problem.  Importantly you have some choices and strategies that you can adopt.  Here are some tips from our Newsletter for Commercial Property Managers.

The existing property market can be quite difficult.  In many locations there is an abundance of vacant space.  For this very reason, there is no point in creating another vacancy within your property that cannot be easily filled.  Excessive vacancies in a property create the wrong image among other tenants and customers that visit the property.  In retail properties this can be a severe problem.

This is where tenant management becomes more important as a strategic process for maintaining property performance.

Reasons for the rental problem are typically:

  • Business slowdown where the economy is placing pressure on the business itself
  • Split up of business partnership where cash flow changes impose some strains on the operation of the business
  • Seasonal pressures relating to the sale of goods or services

As difficult as these issues are, they are very common and property managers together with the relative landlord for the property have some decisions and solutions to consider.  Importantly, the right decision should be made based on the operational factors of the property, the conditions in the local market, the particular tenant profile, and the landlord’s cash flow.  It is a fine balance that requires careful consideration.

So the alternatives when you strike this problem are usually one or more of the following:

  1. Work with the tenant to facilitate a lower rental compromise whilst trading is difficult.
  2. Vacate the tenant and bring the lease to an end so you can lease the premises to other tenants
  3. Relocate the tenant into smaller premises within the same property that can allow them to operate with lower overheads
  4. Allow the tenant to find a sub tenant that can help them with part of the rental payments for the property
  5. Provide the tenant with a compromise concession rental for a period of time after which the rental will return to its original level

All of these factors are suitable solutions to the rental problem based on the needs of the tenant, the landlord, and the property cash flow.  They all have advantages and disadvantages however they are all worth considering in certain circumstances.  When the correct decision is made, it is necessary to work with the landlord’s solicitor to ensure that suitable documentation occurs between both parties in keeping with the chosen strategy.