Leases & Landlords

The initial Covid-19 lockdown in 2020, and the various changes of alert levels since, have caused a lot of franchisors and franchisees to examine their lease agreements. While many landlords have been prepared to offer some form of rent relief to tenants who were locked out of their premises or otherwise had only restricted trade, others have insisted on receiving full rent or only minimal reductions.

As a result, we have been involved in many more lease negotiations and disputes than might typically be expected otherwise. Our experience is that the following things vary greatly:

• What particular leases say about this sort of “no access” situation; 
• How different people might read and interpret the same clause in a lease; and
• What people think is ‘fair’ in a given situation (we often find that people seem to lose a degree of reasonableness or objectivity, and push for more extreme positions when they’re under stress). 

We’ve had good success at helping clients resolve disputes in this area, and one benefit of being in a good franchise system with a supportive franchisor is that they may also be able to give you some support and guidance when things get tough. If possible, however, it’s obviously better to avoid potential disputes in the first place – and that starts with paying attention, and negotiating well, when you’re first considering entering a lease.

There is no one-size-fits-all solution that will suit all franchisees and all leases, but here are some general tips for franchisees entering new leases in these Covid-19 times.

Pay attention to the form of lease

The most recent ADLS forms of lease have had the clause 27.5 which tenants have wanted to rely on. This states:

If there is an emergency and the Tenant is unable to gain access to the premises to fully conduct the Tenant’s business from the premises because of reasons of safety of the public or property or the need to prevent or overcome any hazard, harm or loss that may be associated with the emergency including: …

(c) Restriction on occupation of the premises by any competent authority. Then a fair proportion of the rent and outgoings shall cease to be payable for the period commencing on the date when the Tenant became unable to gain access to the premises to fully conduct the Tenant’s business from the premises until the inability ceases.

Other forms of lease are often more created by landlords and as a result, are more ‘landlord-friendly’. Many of these haven’t had a clause equivalent to the one in the ADLS document, and tenants have been disappointed to learn that they had no contractual entitlement to a rent abatement even in more severe lockdown situations. 

An ADLS lease is often likely to be a better starting point for a tenant if you can get that (though we note that larger landlords operating malls or office buildings are likely to insist on their own forms of lease so you may not get that option). Even if you won’t necessarily be able to get an ADLS form of lease, or other satisfactory rent abatement clauses dealing with Covid type lockdown situations, it’s important to understand what the lease does say – and what risk that brings.

Beware of clauses that ‘pre-agree’ what abatement is fair

Many landlords now seem to include clauses which try to specify in advance how lockdowns will affect rent. The certainty that would bring would seem at first glance to be good for tenants, but most of the clauses we’ve seen are drafted for the landlord’s benefit and aim to limit what the tenant might otherwise try to argue was ‘fair’. 

Leases tend to run for a long time, and we question whether it is sensible to try and agree now what might be fair or appropriate many years from now, in a situation that could be quite different. For instance, future pandemics (even those caused by Covid-19 variants let alone entirely different viruses) might look, and be handled, quite differently. A different virus/disease could have entirely different characteristics, and those could make a difference to how a government responds. As a result, it is hard to tell now what the impact on the tenant and their business might be. How can anyone be sure then of how rent should be affected as a result, for situations that could occur a long time in the future, under different governments?

The ADLS clause was deliberately drafted in a non-prescriptive way which required a determination at the time of what was ‘fair’. This was done to give that flexibility and avoid unfair outcomes no-one would have seen coming. For the same reason, we would recommend caution about agreeing to ‘fix’ lockdown outcomes in advance in your leases, even if that does seem tempting. We believe a tenant would usually be better off with a clause that allows a ‘fair’ abatement, which can be debated at the relevant time, taking the actual circumstances into account. 

Consider seeking shorter lease terms or asking for ‘break clauses’

In uncertain times, it can be difficult being sure of much. Some businesses have unexpectedly thrived as a result of changing demands resulting from Covid, while others have suffered more. Generally, shorter lease terms, with rights to renew the lease for extra periods, are better for tenants as they still give the option to stay on for the same period if all is going well, but it’s easier to exit sooner if things go badly. Alternatively, you might try to negotiate for an ability to exit the lease early so long as you give a minimum agreed amount of prior notice. A landlord’s position likely depends on how much other demand there is for the space, but you don’t get what you don’t ask for. 

Beware of giving unlimited personal guarantees

Generally, if a landlord has to call on your personal guarantee, something has gone seriously wrong and the tenant is facing loss of their business and liquidation of their company. Although it is sometimes reasonable for a landlord to want a tenant to stand behind their company’s lease obligations and have some personal ‘skin in the game’, you may want to negotiate some limits to any guarantees that are given. 

Many landlords will be most likely to agree to limit the maximum liability under your PG’s if you ask at the time you’re about to sign up. They tend to be less reasonable later, when actual issues have arisen, and you’re trying to keep the shirt on your back. Having limits on guarantees may protect you in a worst-case scenario, but it could also help to focus the landlord on trying to mitigate their losses when things go wrong. Again, however, you don’t get what you don’t ask for, so it’s worth seeking limits on guarantees as part of any lease negotiation.

Final message

Even in the best of times, leases are serious contracts and need to be treated as such – so that’s even more the case in times of uncertainty like these. A good lawyer should be able to explain risks, point out things that could be improved for you, and generally help you get the benefit of other people’s hard-earned lessons. You only get one chance, so don’t waste that opportunity!

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