Like the rest of Australia, the team at LPC is saddened by the effects of the floods in Queensland and New South Wales. We hope everyone remains safe and wish all businesses a speedy recovery. With the recovery effort underway, many tenants will be contemplating how they will get their business back up and running. What many tenants do not realise is that there are clauses in standard lease documents that allow for abatement of rent if their premises is damaged. LPC has been working with tenants in providing a commercial review of their lease documents to ensure that if there is an opportunity to abate rent or for the landlord to repair the damage, tenants take up that opportunity to limit their occupancy costs.
A quick snapshot, from a commercial perspective, of a ‘damage’ clause provides provisions in the lease as to which party is responsible for repairing damage to the building which has not been caused by the tenant. In the case of many businesses in Queensland and New South Wales, the most recent example is by flood. Whilst we note that leases vary, the standard provision is that the landlord must notify the tenant whether they intend to repair the damage to the building. In the case of only a section of the building being affected by ‘damage’ the tenant’s rental payments will reduce to the proportionate loss of amenity caused by the damage. What we have advised is that Tenants closely check their lease provisions in order to secure rental abatement during this difficult time.
Whilst clauses such as the damage clause can provide relief in the short term, LPC has been advocating for more encompassing Utilisation clauses to be inserted into lease arrangements to make them more tenant friendly. LPC has always advocated for tenants to ‘think of a lease as buying utility of a leased asset with the property owner’s warranty relating to the promised utility.’ Meaning that tenants need to consider their leased premises as a service from the landlord, and if that service cannot be provided, either from damage, a pandemic or government mandate, then payments for that service should either stop or abate.
At LPC we help to mitigate the risk of diminished utilisation in different ways, including negotiating property owner guarantees pertaining to the attributes that made the premises the preferred choice. The ‘end in mind’ is that the tenant gets what was promised without interruption, supported by appropriate provisions that protect the tenant should utilisation be impaired for reasons beyond the tenant’s control. Whilst the pandemic was dramatic in its impact on utilisation, there are many other more subtle factors that negatively impact the tenant’s utility value over the term. These include downgrade to building status (or shopping centre performance for a retailer), drop off in the building services regime, change to the tenancy mix such that utility value is negatively impacted, reduction in the appeal of the common amenities, landlord and / or redevelopment works that impact utility, drop off in foot traffic (key factor for retail), and a great many other identifiable risks that the tenant does not control and that impact utility value.
For further information on how to apply your damage clause or to seek a better understanding of how LPC are incorporating utilisation into their client’s lease negotiations, please reach out to our team for further information.
About LPC & the LPC subscription service
LPC provides office, retail, and industrial occupiers with advice and services that make a difference to their accommodation arrangements and respective businesses. With no ties to investor property owners or leasing agents we only represent occupiers, and our advice is free from any conflict of interest that would disadvantage an occupier. Our single purpose is to help commercial occupiers optimise their accommodation and tenancy arrangements. You will find the LPC subscription service most useful when it comes to identifying key terms for renegotiation and getting to the lease you deserve.
At LPC, we partner with tenants and occupiers across Australia and New Zealand to optimise their office, industrial and retail property portfolios providing an integrated suite of services including transaction management, portfolio and lease management and project management. We provide conflict-free advice and representation, meaning we have no ties with owner-developers or landlords. Tenants and occupiers interests remain at the core of what we do as we negotiate on your behalf and endeavour to rebalance the scales in a market which favours landlords.