The rent must go through

When times are tough, a business can put payments on hold for a whole range of services and products. When bills mount up, some can be put off for the short term, and the consequences are not disastrous.

But when it comes to non-payment or delays in rental payments for commercial property leases, delays can cause a complete breakdown for both parties.

Defaulting on payments can trigger a range of scenarios depending on the terms and conditions of a lease, and will have a landlord look to apply pressure from the fine print the parties have agreed to.

At worst, a landlord can terminate the lease and demand all payments through to the end of the term, arrears, a sum for “make good” on a property, and end up changing the locks barring a tenant from their business virtually overnight.

Naturally this would be a horrendous outcome for a business tenant and likewise bad news for the landlord losing income from a tenant.

It’s important for parties to walk in each others shoes a little. For instance, it is worth the tenant considering the impacts on a landlord if rental payments default. The landlord has responsibilities for paying utilities including lighting, water and gas, as well as tax payments, rates, mortgages, salaries and returns to investors. Late or defaulting payments can jeopardise all of these.

It is all too common for tenants and landlords to hit a complete breakdown over payments, with the tenant stubbornly taking an “I’m paying for this space” attitude, while the landlord sticks to “Well, it’s my building!” This quickly becomes a no-win situation.

The two key things to ensure there is not a complete breakdown around rental defaults are expert advice when a lease is drawn up, and clear and timely communication.

A good advisor will ensure the lease is reasonable when it comes to remedies for defaulting, e.g. clauses that are fair when it comes to a period of grace if a tenant cannot make payment, perhaps up to a month, rather than a landlord being able to slap a notice on a tenant a day or so after a rental payment is due.

There are a whole range of lease clauses that can appear in a lease, each of which can trigger default remedies for the landlord, which must be worked through.

Communication is critical if a tenant is having trouble meeting rental payment deadlines. It is important they get in touch with a landlord before a payment is missed, and work out an alternative arrangement.

Too often people take an ostrich approach and stick their head in the sand rather than face up ahead of time to the fact that a payment might be delayed.

In many ways this all sounds like common sense but it is amazing how often I end up dealing with a messy breakdown, simply through tenants being unaware of what will happen if payments default and not communicating with their landlord.

I recommend commercial tenants take their rental payments very seriously and not lump them into the same category as other bills. The consequences are just too great, and can put landlord and tenant alike out of business in a very short space of time.

That’s a real shame when the disaster can be averted through clear communication and a lease prepared with manageable conditions.